CASTLE DENTAL CENTERS INC, 424B1, 1997-09-12

CASTLE DENTAL CENTERS INC
424B1, 1997-09-12
NURSING & PERSONAL CARE FACILITIES

Previous: SNYDER COMMUNICATIONS INC, 8-K, 1997-09-12

Next: WILLIS LEASE FINANCE CORP, 8-K, 1997-09-12

PROSPECTUS

2,500,000 SHARES

[LOGO CASTLE DENTAL CENTERS]

COMMON STOCK

The 2,500,000 shares of Common Stock (the "Common Stock") offered hereby
are being sold by Castle Dental Centers, Inc. (the "Company"). Prior to this
offering, there has been no public market for the Common Stock. The Common Stock
has been approved for listing on the Nasdaq Stock Market's National Market under
the symbol "CASL."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.

------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------
Per Share............. $13.00 $0.91 $12.09
- -------------------------------------------------------------------------------
Total(3).............. $32,500,000 $2,275,000 $30,225,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting estimated expenses of $1,700,000 payable by the Company.

(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $37,375,000, the total
Underwriting Discount will be $2,616,250 and the total Proceeds to the
Company will be $34,758,750. See "Underwriting."

------------------

The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about September 17, 1997.

------------------

J.C. Bradford &Co. Southcoast Capital
Corporation

September 12, 1997
<PAGE>
CASTLE DENTAL CENTERS, INC.

[Graphics -- Map of the United States showing locations of the Company's
headquarters and regional office locations. Locations identified include actual
locations as of the date of the prospectus as well as locations to be acquired
in pending transactions.]

CASTLE DENTAL CENTER (Registered Trademark) AND CASTLE DENTAL CENTERS
(Registered Trademark) ARE REGISTERED TRADEMARKS OF CASTLE DENTAL CENTERS, INC.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER MATTERS SET FORTH UNDER "RISK FACTORS" HEREIN. UNLESS OTHERWISE
INDICATED, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION IN THIS PROSPECTUS (I)
GIVES EFFECT TO A ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED
IN JUNE 1997 AND (II) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED.

EFFECTIVE DECEMBER 31, 1995, AS PART OF A REORGANIZATION AND
RECAPITALIZATION PLAN (THE "REORGANIZATION"), THE COMPANY MERGED WITH AND
SUCCEEDED TO THE BUSINESS OF FAMILY DENTAL SERVICES OF TEXAS, INC. ("FAMILY
DENTAL"), A TEXAS CORPORATION FORMED IN 1981 AND WHOLLY-OWNED BY MEMBERS OF AND
ENTITIES CONTROLLED BY MEMBERS OF THE FAMILY OF JACK H. CASTLE, D.D.S. (THE
"CASTLE FAMILY"). SEE "THE COMPANY," "CERTAIN TRANSACTIONS" AND NOTES 1
AND 2 TO THE COMPANY'S FINANCIAL STATEMENTS. THE COMPANY DOES NOT ENGAGE IN THE
PRACTICE OF DENTISTRY BUT RATHER ESTABLISHES INTEGRATED DENTAL NETWORKS BY
ENTERING INTO MANAGEMENT SERVICES AGREEMENTS OBLIGATING THE COMPANY TO PROVIDE
MANAGEMENT AND ADMINISTRATIVE SERVICES TO AFFILIATED DENTAL PRACTICES. UNLESS
THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" REFERS TO CASTLE DENTAL CENTERS,
INC., ITS PREDECESSOR, FAMILY DENTAL, AND ITS WHOLLY-OWNED SUBSIDIARIES, AND THE
TERMS "AFFILIATED DENTAL PRACTICES" AND "AFFILIATED PRACTICES" REFER TO
DENTAL PRACTICES TO WHICH THE COMPANY PROVIDES MANAGEMENT SERVICES PURSUANT TO
MANAGEMENT SERVICES AGREEMENTS.

THE COMPANY

Castle Dental Centers, Inc. (the "Company") develops, manages and
operates integrated dental networks through contractual affiliations with
general, orthodontic and multi-specialty dental practices in the United States.
The Company currently conducts operations in the states of Texas, Florida and
Tennessee and is managing and has agreed to acquire a multi-location dental
practice located in Austin, Texas (the "Austin Acquisition") which the Company
believes will complement its existing Austin operations. The Company establishes
integrated dental networks through affiliations with dental practices providing
high-quality care in selected markets with a view to achieving broad geographic
coverage within those markets. The Company seeks to achieve operating
efficiencies by consolidating and integrating affiliated practices into regional
networks, realizing economies of scale in such areas as marketing,
administration and purchasing. The Company also seeks to enhance the revenues of
its affiliated dental practices by increasing both patient visits and the range
of specialty services offered. As of August 1, 1997, the Company provided
management services to 40 dental centers with 108 affiliated dentists,
orthodontists and other dental specialists.

Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily sole practitioners, or small
groups of dentists, orthodontists or other dental specialists, practicing at a
single location with a limited number of professional assistants and business
office personnel. Dental, orthodontic and other specialty practices are
increasingly forming larger group practices in which a separate professional
management team handles personnel, management, billing, marketing and other
business functions. According to the Health Care Financing Administration,
Health Care Financing Review (1995), the annual aggregate domestic market for
dental services is estimated to be approximately $42.9 billion for 1995,
representing approximately 4.3% of total health care expenditures in the United
States, and is projected to reach $79.1 billion by 2005. The dental services
market has grown at a compound annual growth rate of approximately 8.1% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.3% through the year 2005. Management believes that the market
size and trends of the dental service industry create an opportunity for the
Company to implement its goal of developing, managing and operating a national
network of affiliated dental practices.

The Company's objective is to make each of its dental networks the leading
group dental care provider in each market it serves. The Company applies
traditional retail principles of business to the practice of dentistry,
including situating practices in high-profile locations, offering more
affordable fees and payment plans, expanding the range of services offered,
increasing market share through targeted advertising and offering extended
office hours. By using the Castle Dental Centers' approach to managing
affiliated dental practices, the Company believes it will enable affiliated
dentists, orthodontists and other dental specialists to focus on delivering
high-quality patient care and to realize greater productivity than traditional
individual and small-group dental practices.

3
<PAGE>
The Company believes that the provision of a full range of dental services
through an integrated network is attractive to managed care payors and intends
to continue to pursue managed care contracts on behalf of the affiliated dental
practices. The Company's affiliated dental practices currently maintain an
aggregate of 11 capitated managed care contracts covering approximately 30,000
members, and, upon consummation of the Austin Acquisition, the Company's
affiliated dental practices will have an aggregate of 16 capitated managed care
contracts covering approximately 50,000 members. The Company believes that the
continued development of its networks will assist it in negotiating national and
regional capitated arrangements on behalf of the affiliated dental practices
with managed care payors.
The Company's strategy is to develop integrated dental networks through
affiliations with dental practices providing quality, cost-effective dental care
in target markets. Key elements of this strategy are to (i) provide
high-quality, comprehensive, one-stop family dental health care; (ii) actively
pursue acquisitions and DE NOVO development in target markets; (iii) apply
traditional retail principles of business to dental care; and (iv) market its
networks to managed care entities.

THE OFFERING

Common Stock offered by the Company..... 2,500,000 Shares
Common Stock to be outstanding after the
offering.............................. 5,780,239 Shares(1)

Use of proceeds......................... To repay a portion of the Company's
outstanding indebtedness and to fund a
portion of the Austin Acquisition. See
"Use of Proceeds."
Nasdaq National Market symbol........... CASL

- ------------
(1) Gives effect to the conversion of 1,244,737 shares of Series A Convertible
Preferred Stock into 705,552 shares of Common Stock, and 485,382 shares of
Series C Convertible Preferred Stock into 242,691 shares of Common Stock,
both of which will be effected simultaneously with and are conditioned upon
the consummation of this offering; and excludes an aggregate of
approximately 880,689 shares issuable on (i) the exercise of options to
purchase an aggregate of 635,000 shares of Common Stock which the Company
will have granted at the closing of this offering under the Company's
Omnibus Stock and Incentive Plan (the "Plan") and the Non-Employee
Directors Stock Option Plan (the "Directors' Plan"); (ii) the exercise of
a warrant held by GulfStar Investments, Ltd. to purchase 56,579 shares of
Common Stock (the "GulfStar Warrant"), (iii) the conversion of two Seller
Notes (as hereinafter defined) into 69,879 shares of Common Stock and (iv)
the conversion of 119,231 shares of Series B Convertible Preferred Stock
into 119,231 shares of Common Stock.

4
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
(1)(2) (1)(2)
1994 1995 1996 1996 1996 1997 1997
--------- --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 17,083 $ 18,257 $ 29,601 $ 42,569 $ 10,707 $ 21,327 $ 23,950
Amounts retained by affiliated dental
practices(3).......................... -- -- 9,981 11,851 3,386 6,954 7,605
--------- --------- --------- ---------- --------- --------- ----------
Net revenues(3)......................... 17,083 18,257 19,620 30,718 7,321 14,373 16,345
Expenses:
Dentists' salaries(3)................. 2,853 3,345 -- -- -- -- --
Professional fees and clinic
expenses(4)......................... -- -- -- 1,997 -- -- --
Clinical salaries..................... 1,811 1,879 4,233 7,178 1,359 2,781 3,533
Dental supplies and laboratory fees... 1,907 2,185 3,120 4,231 1,351 1,967 2,313
Rental and lease expense.............. 681 836 1,592 2,266 490 1,258 1,316
Advertising and marketing............. 1,062 959 1,522 2,034 533 1,031 1,120
Depreciation and amortization......... 309 336 1,088 1,780 334 963 1,125
Other operating expenses.............. 2,205 2,260 2,913 3,818 1,045 1,784 1,958
General and administrative(5)......... 5,319 9,109 4,292 5,808 1,200 3,047 3,361
--------- --------- --------- ---------- --------- --------- ----------
Total expenses.................... 16,147 20,909 18,760 29,112 6,312 12,831 14,726
--------- --------- --------- ---------- --------- --------- ----------
Operating income (loss)................. 936 (2,652) 860 1,606 1,009 1,542 1,619
Interest expense........................ 112 87 2,596 433 1,065 1,683 187
Other income(6)......................... -- -- (89) (89) (106) (12) (12)
--------- --------- --------- ---------- --------- --------- ----------
Income (loss) before income taxes....... 824 (2,739) (1,647) 1,262 50 (129) 1,444
Provision (benefit) for income taxes.... 43 (325) (561) 430 19 (49) 549
--------- --------- --------- ---------- --------- --------- ----------
Net income (loss)(7).................... 781 (2,414) (1,086) 832 31 (80) 895
Preferred stock dividends(8)............ -- -- -- -- -- (309) --
--------- --------- --------- ---------- --------- --------- ----------
Net income (loss) attributable to common
stock................................. $ 781 $ (2,414) $ (1,086) $ 832 $ 31 $ (389) $ 895
========= ========= ========= ========== ========= ========= ==========
Net income (loss) per share(9).......... $ (0.30) $ 0.14 $ 0.01 $ (0.10) $ 0.16
========= ========== ========= ========= ==========
Weighted average outstanding
shares(9)............................. 3,598 5,745 3,020 3,770 5,745

SELECTED OPERATING DATA:
(END OF PERIOD)
Number of Dental Centers................ 8 8 35 39 8 35 39
Number of Dentists...................... 35 39 98 112 39 93 108
</TABLE>
JUNE 30, 1997
------------------------
PRO FORMA AS
ACTUAL ADJUSTED(10)
--------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 1,488 $ 2,311
Working capital......................... (11,978) 2,578
Total assets............................ 32,167 37,597
Long-term debt and capital lease
obligations, less current portion..... 10,327 3,049
Redeemable preferred stock(11).......... 4,381 1,550
Total stockholders' equity (deficit).... (3,898) 25,256

5
<PAGE>
- ------------

(1) Gives effect to (i) the issuance of $2.0 million of the Company's 12%
Senior Subordinated Notes, and the issuance of 485,382 shares of Series C
Convertible Preferred Stock (collectively, the "Interim Financing"), (ii)
the sale of 2,500,000 shares of Common Stock offered by the Company hereby
and the application of the net proceeds therefrom as described under "Use
of Proceeds," and (iii) the Acquisition Transactions (as hereinafter
defined) as if each of such transactions had occurred as of January 1,
1996. See "Unaudited Pro Forma Consolidated Financial Information."

(2) The pro forma statements of operations do not reflect a $3.8 million
extraordinary loss on retirement of the $9.5 million of Senior Subordinated
Notes, and an additional $1.5 million non-cash dividend on the Series C
Convertible Preferred Stock, which will be recognized in the period this
offering is completed. (See Note 8 below.)

(3) In periods prior to 1996, the Company operated as a dental service company
and reported all of its revenues as patient revenues. Subsequent to the
Reorganization, the Company has provided practice management services to
the affiliated dental practices, and, as a result, its net revenues
beginning January 1, 1996 consist of amounts earned by the Company under
the terms of its management services agreements with affiliated dental
practices, which equal patient revenues less amounts retained by affiliated
dental practices. Amounts retained by affiliated dental practices consist
primarily of compensation paid to dental professionals, which were
classified as expenses of the Company prior to the Reorganization.

(4) Represents preacquisition operating costs that an acquired dental practice
paid to its affiliated dentists for dentist compensation, clinical
salaries, dental supplies and laboratory fees.

(5) In 1995, the Company expensed $2.6 million of deferred compensation in
connection with the Reorganization.

(6) Represents primarily gain or loss on sale of assets and interest income.

(7) Prior to the Reorganization, significant operations of the Company were
conducted through a subchapter S corporation and accordingly were not
subject to federal and state income taxes (see Notes 2 and 8 to the
Company's Financial Statements). If all of the Company's operations had
been subject to income taxes, net income (loss) would have been $515,000
and ($1.7 million) for the years ended December 31, 1994 and 1995,
respectively. Subsequent to December 31, 1995, the Company's operations are
subject to income taxes and such taxes have been reflected in the
historical consolidated statement of operations data for the year ended
December 31, 1996. See "Unaudited Pro Forma Consolidated Financial
Information."

(8) The Company recorded a $309,000 non-cash dividend to accrete the Series A
Convertible Preferred Stock and the Series C Convertible Preferred Stock to
their estimated fair value at their redemption date of December 2001. The
Company anticipates recording an additional $1.5 million non-cash dividend
on the Series C Convertible Preferred Stock and a $3.8 million
extraordinary loss on the Senior Subordinated Notes upon conversion of the
Series A Convertible Preferred Stock and the Series C Convertible Preferred
Stock into the Company's Common Stock and retirement of the Senior
Subordinated Notes in connection with the offering.

(9) Shares used in calculating net income per share for the year ended December
31, 1996 and the six months ended June 30, 1997 include the weighted
average outstanding shares plus the number of shares, the proceeds from the
sale of which would be necessary to repay the portion of the Company's debt
that funded the $6.0 million payment to Jack H. Castle, D.D.S. in
connection with the Reorganization. See "Unaudited Pro Forma Consolidated
Financial Information" and "Certain Transactions."

(10) Gives effect to (i) the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds," (ii) the conversion of the Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock into
an aggregate of 948,243 shares of Common Stock, and (iii) the Austin
Acquisition and the issuance of 119,231 shares of Series B Convertible
Preferred Stock, as if each of such transactions had occurred as of June
30, 1997.

(11) The actual amount represents 1,244,737 shares of Series A Convertible
Preferred Stock, and 485,382 shares of Series C Convertible Preferred
Stock. The pro forma adjusted amount represents 119,231 shares of Series B
Convertible Preferred Stock.

6
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.

RISKS ASSOCIATED WITH EXPANSION STRATEGY

The Company's strategy is to develop comprehensive dental networks through
practice affiliations. Key elements of this strategy include the acquisition of
the assets of dental practices and the introduction of specialty dental services
in target market areas, the entry into management services relationships with
such groups and the utilization of the acquired practices as a base from which
to expand in the target markets as well as the development of DE NOVO dental
centers in those markets. Identifying candidates to become affiliated practices
and proposing, negotiating and implementing economically feasible affiliations
with such groups can be a lengthy, complex and costly process. Additionally,
other companies are pursuing the acquisition and development of dental
practices, which may adversely affect the availability of acquisition candidates
and may lead to higher acquisition prices. There can be no assurance that the
Company will successfully establish practice affiliations with additional dental
practices or develop DE NOVO dental centers. In addition, the Company's ability
to acquire or develop dental centers is dependent on factors such as its ability
to attract additional dentists, to adapt or adjust the Company's structure to
comply with present or future state legal requirements affecting the Company's
contractual arrangements with dental, orthodontic or other specialty practice
groups, and to obtain regulatory approval and comply with regulatory and
licensing requirements applicable to dentists and facilities operated and
services offered by them. Moreover, the Company's ability to expand may be
limited by state licensing requirements which do not normally provide for
reciprocity among states with respect to licensure of dentists. Unless otherwise
required by law, the Company does not intend to seek stockholder approval for
future acquisitions, and the stockholders of the Company will be dependent upon
management's judgment with respect to such transactions. There can be no
assurance that the Company will be able to achieve planned growth, that the
assets of dental practices will continue to be available for acquisition by the
Company, that the Company will successfully establish DE NOVO dental centers,
that the Company will be able to realize expected operating and economic
efficiencies from recent, pending or future acquisitions or that the addition of
such practice groups will be profitable. See "-- Integration of Affiliated
Dental Practices and Management Information Systems," "Business -- Dental
Network Development" and "Business -- Operations."

RETENTION AND HIRING OF DENTISTS

Each affiliated dental practice has entered into an employment agreement
with substantially all of its full-time dentists, orthodontists and other dental
specialists. Although the form of contract varies somewhat among practices and
among dentists with different specialties, the typical contract for a full-time
dentist provides for defined compensation arrangements, including
performance-based compensation, and where market conditions permit and to the
extent permitted by applicable law, a covenant not to compete. If the affiliated
practice is not successful in renewing a significant number of the employment
agreements or if the employment agreements are determined to be unenforceable or
more limited in scope than their terms, the Company's business, financial
condition and operating results could be materially and adversely affected. In
addition, the Company's strategy of DE NOVO development is dependent on the
availability of employable dentists and the Company's ability to compete
successfully in competitive hiring markets. There can be no assurance the
affiliated practices will be able to employ dentists in sufficient numbers for
the Company's existing dental centers, for acquired dental practices or for DE
NOVO dental centers planned for future development. Insufficient numbers of
dentists available for employment on favorable terms may have a material adverse
effect on the Company's business, results of operations and dental network
development. See "Business -- Dental Network Development."

RELIANCE ON AFFILIATED DENTAL PRACTICES

The Company receives fees for management services provided to its
affiliated dental practices under management services agreements. However, the
Company is an independent manager only and does not employ dentists,
orthodontists or other dental specialists to practice dentistry or in any way
control the

7
<PAGE>
professional aspects of the practices of the dentists, orthodontists or other
dental specialists employed by the affiliated dental practices. The Company's
management services revenue and profitability are dependent on revenue generated
by and profitability of affiliated dental practices. While the laws of some
states permit the Company to participate in the negotiations by affiliated
dental practices of managed care contracts, preferred provider arrangements and
other negotiated price agreements, the affiliated dental practices are the
contracting parties for all such relationships, and the Company is dependent on
its affiliated dental practices for the success of such relationships.
Accordingly, the profitability of such payor relationships as well as the
performance of dentists, orthodontists or other specialists employed by such
dental practices affects the Company's profitability. Any difficulty on the part
of the Company's affiliated dental practices in hiring or retaining qualified
dentists, orthodontists or other specialists, or any material decrease in the
revenues of affiliated dental practices could have a material adverse effect on
the financial performance of the Company.

INTEGRATION OF AFFILIATED DENTAL PRACTICES AND MANAGEMENT INFORMATION SYSTEMS

Although the Company has been in operation since 1981, prior to May 1996,
the Company's operations were conducted entirely in the Houston, Texas area, and
the Company has limited experience in managing affiliated dental practices
outside of the Houston, Texas area. The Company has been providing management
services to 29 of the dental centers for a period of less than 18 months. The
entry of the Company into new geographic markets through acquisitions will
require the Company to maintain and establish payor and client relationships
which may be different in nature than those which the Company has historically
had, and the Company will need to attract and retain competent and experienced
management personnel in each market it enters. The Company may also be dependent
on former owners and management to maintain its payor and customer
relationships. In addition, the expansion into new markets requires the
implementation of new or expanded reporting and tracking systems, management
information systems and other operating systems. There can be no assurance that
the Company will be able to expand its organizational structure, maintain or
establish such relationships or attract the management and other personnel
necessary to permit it to integrate affiliated dental practices located outside
of the Houston, Texas area into its existing operations.

In connection with its expansion into new market areas, the Company will be
required to interface its financial information system with existing practice
management systems at the affiliated dental practices, which may be different
from those used by the Company. Any significant delay or increase in expense
associated with the conversion and integration of management information systems
used by affiliated dental practices could have a material adverse effect on the
successful integration of affiliated dental practices. See " -- Risks
Associated with Expansion Strategy."

NEED FOR ADDITIONAL FINANCING

The Company's acquisition and expansion programs will require substantial
capital resources. Capital is needed not only for the acquisition of the assets
of affiliated dental practices, but also for the effective integration,
operation and expansion of the affiliated practices. The affiliated practices
may require capital for renovation and expansion and for the addition of dental
equipment and technology. To finance capital requirements, the Company
anticipates that it will from time to time issue additional equity securities
and incur additional debt. Additional debt or non-Common Stock equity financings
could be required to the extent that the Company's Common Stock fails to
maintain a market value sufficient to warrant its use for future financing
needs. The Company may not be able to obtain additional required capital on
satisfactory terms, if at all. The failure to raise the funds necessary to
finance the expansion of the Company's operations or the Company's other capital
requirements could materially and adversely affect the Company's ability to
pursue its strategy and the Company's operating results in future periods. If
additional funds are raised through the issuance of equity securities, dilution
to the Company's existing stockholders may result. If additional funds are
raised through the incurrence of debt, such debt instruments will likely contain
restrictive financial, maintenance and security covenants. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

8
<PAGE>
GOVERNMENT REGULATION

GENERAL

The dental industry is regulated extensively at both the state and federal
levels. Regulatory oversight includes, but is not limited to, considerations of
fee-splitting, corporate practice of dentistry, anti-kickback legislation and
state insurance regulation. See "Business -- Government Regulation."

FEE-SPLITTING; CORPORATE PRACTICE OF DENTISTRY

The laws of many states prohibit dentists from splitting fees with
non-dentists and prohibit non-dental entities such as the Company from engaging
in the practice of dentistry or employing dentists to practice dentistry. The
specific restrictions against the corporate practice of dentistry as well as the
interpretation of those restrictions by state regulatory authorities vary from
state to state. The restrictions are generally designed to prohibit a non-dental
entity from controlling the professional assets of a dental practice (such as
patient records and payor contracts), employing dentists to practice dentistry
(or, in certain states, employing dental hygienists or dental assistants),
controlling the content of a dentist's advertising or professional practice or
sharing professional fees. The laws of many states also prohibit dental
practitioners from paying any portion of fees received for dental services in
consideration for the referral of a patient. In addition, many states impose
limits on the tasks that may be delegated by dentists to dental assistants.

State dental boards do not generally interpret these prohibitions as
preventing a non-dental entity from owning non-professional assets used by a
dentist in a dental practice or providing management services to a dentist
provided that the following conditions are met: a licensed dentist has complete
control and custody over the professional assets; the non-dental entity does not
employ or control the dentists (or, in some states, dental hygienists or dental
assistants); all dental services are provided by a licensed dentist; and
licensed dentists have control over the manner in which dental care is provided
and all decisions affecting the provision of dental care. State laws generally
require that the amount of a management fee be reflective of the fair market
value of the services provided by the management company, and certain states
require that any management fee be a flat fee or cost-plus fee based on the cost
of services performed by the Company. In general, the state dental practice acts
do not address or provide any restrictions concerning the manner in which
companies account for revenues from a dental practice subject to the above-noted
restrictions relating to control over the professional activities of the dental
practice, ownership of the professional assets of a dental practice and payments
for management services.

The Company does not control the practice of dentistry or employ dentists
to practice dentistry. Moreover, in states in which it is prohibited, the
Company does not employ dental hygienists or dental assistants. The Company
provides management services to its affiliated practices, and believes that the
management fees the Company charges for those services are consistent with the
laws and regulations of the jurisdictions in which it operates. Therefore, the
Company believes that its operations comply in all material respects with the
above-described laws to which it is subject. There can be no assurance, however,
that a review of the Company's business relationships by courts or other
regulatory authorities would not result in determinations that could prohibit or
otherwise adversely affect the operations of the Company or that the regulatory
environment will not change, requiring the Company to reorganize or restrict its
existing or future operations. The laws regarding fee-splitting and the
corporate practice of dentistry and their interpretation vary from state to
state and are enforced by regulatory authorities with broad discretion. There
can be no assurance that the legality of the Company's business or its
relationship with affiliated dental practices will not be successfully
challenged or that the enforceability of the provisions of any management
services agreement will not be limited. The laws and regulations of certain
states in which the Company may seek to expand may require the Company to change
the form of relationships entered into with dental practices in a manner which
may restrict the Company's operations or how providers may be paid in those
states or may prevent the Company from acquiring the non-dental assets of such
practices or managing dental practices in those states. Similarly, there can be
no assurance that the laws and regulations of the states in which the Company
presently maintains operations will not change or be interpreted in the future

9
<PAGE>
either to restrict or adversely affect the Company's existing or future
relationships with dental practitioners in those states.

ANTI-KICKBACK LEGISLATION

Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item, in each case,
reimbursable under Medicare, Medicaid or other federal and state health care
programs. These provisions apply to dental services covered under various
government programs in which the Company participates. The federal government
has increased scrutiny of joint ventures and other transactions among health
care providers in an effort to reduce potential fraud and abuse related to
Medicare and Medicaid costs. Many states have similar anti-kickback laws, and in
many cases these laws apply to all types of patients, not just Medicare and
Medicaid beneficiaries. The applicability of these federal and state laws to
transactions in the health care industry such as those to which the Company is
or may be a party has not been the subject of judicial interpretation. There can
be no assurance that judicial or administrative authorities will not find these
provisions applicable to the Company's operations, which could have a material
adverse effect on the Company's business and dental network development.

Under current federal law, a physician or dentist or member of his
immediate family is prohibited from referring Medicare or Medicaid patients to
any entity providing "designated health services" in which the physician or
dentist has an ownership or investment interest, including the physician's or
dentist's own group practice, unless such practice satisfies the "group
practice" exception. The designated health services include the provision of
clinical laboratory services, radiology and other diagnostic services (including
ultrasound services), radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
certain equipment and supplies, prosthetics, orthotics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services. A
number of states also have laws that prohibit referrals for certain services
such as x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies. Any future expansion of these prohibitions to other health services
could restrict the Company's ability to integrate affiliated practices and carry
out the dental network development.

Noncompliance with, or violation of, either the anti-kickback provisions or
restrictions on referrals of designated health services can result in exclusion
from the Medicare and Medicaid programs as well as civil and criminal penalties.
Similar penalties apply for violations of state law. While the Company intends
to make every effort to comply with all applicable law, the exclusion from
Medicare, Medicaid or other capitation programs could have a material adverse
effect on the business and results of operations of the Company.

STATE INSURANCE REGULATION

In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is subject to interpretation by regulators with broad discretion. As the
Company's affiliated practices contract with third-party payors, including
self-insured plans, for certain non-fee-for-service arrangements, the affiliated
dental practices may become subject to state insurance laws. In the event that
the Company or the affiliated practices are determined to be engaged in the
business of insurance, such parties could be required either to seek licensure
as an insurance company or to change the form of their relationships with
third-party payors and may become subject to regulatory enforcement actions. In
such event, the Company's revenues may be adversely affected.

10
<PAGE>
HEALTH CARE REFORM PROPOSALS

The United States Congress has considered various types of health care
reform, including comprehensive revisions to the current health care system. It
is uncertain what legislative proposals will be adopted in the future, if any,
or what actions federal or state legislatures or third party payors may take in
anticipation of or in response to any health care reform proposals or
legislation. Health care reform legislation adopted by Congress could have a
material adverse effect on the operations of the Company, and changes in the
health care industry, such as the growth of managed care organizations and
provider networks, may result in lower payment levels for the services of dental
practitioners affiliated with dental practices managed by the Company, and lower
profitability for affiliated practices. See "Business -- Government
Regulation."

COMPETITION

The Company is under competitive pressures for the acquisition of the
assets of, and the provision of management services to, additional dental
practices. Management is aware of several companies with established operating
histories and greater resources than the Company which are pursuing the
acquisition of general and specialty dental practices and the management of such
practices. Accordingly, the Company expects to face competition for acquisition
candidates, which may limit the number of acquisition opportunities and lead to
higher acquisition prices. Additionally, affiliated dental practices compete
locally with sole practitioners and group practices of dental, orthodontic and
other specialty services in the Company's markets. There can be no assurance
that the Company or its affiliated dental practices will be able to compete
effectively with these competitors, that additional competitors will not enter
the market or that their competition will not make it more difficult to acquire
and provide management services to dental practices on terms beneficial to the
Company. See "Business -- Competition."

RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS; CAPITATED FEE REVENUE

The Company believes that its success will be dependent, in part, on its
ability to negotiate, on behalf of the affiliated practices, contracts with
dental maintenance organizations, insurance companies, self insurance plans and
other private third-party payors pursuant to which services will be provided on
some type of fee-for-service or capitated basis by some or all of its affiliated
practices. Under certain capitated contracts, the health care provider accepts a
predetermined amount per patient per month as its sole payment in exchange for
providing certain necessary covered services to enrollees. These contracts shift
much of the risk of providing health care from the payor to the provider. To the
extent that the Company's affiliated dental practices enter into these types of
arrangements, they are exposed to the risk that the cost of providing dental
care required by these contracts exceeds the amount that the affiliated dental
practice receives for providing such dental care. Most of these contracts are
terminable by either party on 30 to 90 days notice. For the 12 months ended
December 31, 1996, the Company's affiliated dental practices derived
approximately 6% of total pro forma adjusted net patient revenues from such
capitated contracts. For a discussion of the regulatory aspects of certain
capitation contracts, see "-- Government Regulation -- State Insurance
Regulation." To the extent the Company's affiliated dental practices enter into
additional managed care contracts, the affiliated dental practices may expect
greater predictability of revenues but greater unpredictability of expenses due
to the fluctuating costs of the services provided. There can be no assurance
that the Company will be able to negotiate on behalf of the affiliated practices
satisfactory arrangements on a capitated basis, regardless of the amount of
risk-sharing. In addition, to the extent that patients or enrollees covered by
certain of these contracts require more frequent or extensive care than is
anticipated, operating margins may be reduced, or the revenues derived from
these agreements may be insufficient to cover the costs of the services
provided. As a result, affiliated practices are at risk for additional costs
which could reduce or eliminate any earnings for the affiliated practices under
these contracts and could adversely affect the profitability of the Company.

RISKS RELATED TO INTANGIBLE ASSETS

As of June 30, 1997, the Company's total pro forma adjusted assets were
approximately $37.6 million, of which approximately $22.6 million, or 60%, were
intangible assets, net of accumulated amortization. The

11
<PAGE>
intangible assets represent the value assigned to the management services
agreements, which is the excess of the purchase price over the fair market value
of the net assets of acquired dental practices (which net assets include any
separately identifiable intangible assets). In connection with the allocation of
the purchase price to identifiable intangible assets, the Company analyzes the
nature of the affiliated dental practice with which a management services
agreement is entered into, including the number of dentists in each practice,
number of dental centers and its ability to recruit additional dentists, the
affiliated practice's relative market position, the length of time each
affiliated dental practice has been in existence, and the term and
enforceability of the management services agreement. Because the Company does
not practice dentistry, maintain patient relationships, hire dentists, enter
into employment and noncompete agreements with the dentists, or directly
contract with payors, the intangible asset created in the purchase price
allocation process is associated solely with the management services agreement
with the affiliated dental practice. There can be no assurance that the value of
these intangible assets will ever be realized by the Company.

All of the intangible assets on the Company's pro forma adjusted balance
sheet as of June 30, 1997 are related to the Acquisition Transactions (as
hereinafter defined) with $6.5 million being attributable to the Austin
Acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company evaluates each acquisition and
establishes an appropriate amortization period based on the underlying facts and
circumstances. Subsequent to each acquisition, the Company continuously
reevaluates such facts and circumstances to determine if the related intangible
asset continues to be realizable and if the amortization period continues to be
appropriate. Amounts assigned to the management services agreements associated
with the Acquisition Transactions are being amortized on a straight-line basis
over a 25-year period.

Amortization of the intangible assets on the Company's pro forma adjusted
balance sheet as of June 30, 1997 will produce annual amortization expense of
approximately $930,000. Of this amount, the Austin Acquisition is expected to
produce annual amortization expense of approximately $258,000. Acquisitions of
additional dental practices resulting in the recognition of additional
intangible assets would cause amortization expense to increase further. Although
the net unamortized balance of intangible assets on the Company's pro forma
balance sheet as of June 30, 1997 was not considered to be impaired, any future
determination that a significant impairment has occurred would require the
write-off of the impaired portion of unamortized intangible assets, which would
have a material adverse effect on the Company's results of operations. See
"Unaudited Pro Forma Consolidated Financial Information."

DEPENDENCE UPON SENIOR EXECUTIVES

The Company is dependent upon the continued services of its executive
officers, especially its Chairman and Chief Executive Officer, Jack H. Castle,
Jr. The loss of the services of Jack H. Castle, Jr. or any of the Company's
other senior executive officers could have a material adverse effect on the
Company's business and prospects. Certain of the Company's senior executive
officers, including Jack H. Castle, Jr., do not have employment agreements and
are not otherwise subject to a covenant not to compete or other agreement which
would restrict their ability to compete against the Company should their
employment by the Company be terminated for any reason. See "Management."

LITIGATION AND INSURANCE

Due to the nature of its business, the Company from time to time becomes
involved as a defendant in medical malpractice lawsuits brought against
affiliated dental practices or dentists employed by such practices. In addition,
the Company could be involved in litigation in which it is alleged that the
Company has been negligent in performing its duties under management services
agreements. The Company maintains professional and general liability insurance
in amounts deemed appropriate by management based upon its assessment of
historical claims and the nature and risks of its business. There can be no
assurance, however, that an existing or future claim or claims will not exceed
the limits of available insurance coverage, that any insurer will remain solvent
and able to meet its obligations to provide coverage for any such claim or
claims or that such coverage will continue to be available or available with
sufficient limits

12
<PAGE>
and at a reasonable cost to insure adequately and economically the Company's
operations in the future. A judgment against the Company in excess of such
coverage could have a material adverse effect on the Company.

RISKS ASSOCIATED WITH POTENTIAL LITIGATION

In July and August 1997, a dentist from whom the Company acquired Horizon
Dental Centers in August 1996 contacted the Company asserting that the Company
misrepresented the value of the Common Stock issued to him as a part of the
consideration for the acquisition, and demanded the issuance of approximately
200,000 shares of Common Stock as additional consideration for the transaction.
The Company believes that the asserted claims are without merit and has denied
the demand for the issuance of additional shares of Common Stock. The Company
has been advised that the dentist does not presently intend to commence
litigation against the Company. In the event, however, that litigation is
initiated against the Company, the Company intends to defend itself vigorously.

CONTROL BY THE CASTLE FAMILY

Following the closing of this offering, members of the Castle Family will
beneficially own approximately 34.6% (32.5%, if the Underwriters' over-allotment
option is exercised in full) of the outstanding shares of Common Stock. As a
result, following the closing of this offering, if the Castle Family were to
vote as a group, the Castle Family could exert significant influence over the
outcome of corporate actions requiring stockholder approval and the election of
the Company's Board of Directors. In addition, this ownership may have the
effect of discouraging unsolicited offers to acquire the Company. See
"Principal Stockholders."

BENEFITS TO INSIDERS

In connection with the Reorganization, the Company paid $6.0 million to
Jack H. Castle, D.D.S., a director of the Company, to acquire a dental practice
owned by Dr. Castle. The payment was funded by a portion of the $13.5 million of
indebtedness incurred in connection with the Reorganization. In the same
transaction, the Company entered into a Deferred Compensation Agreement with Dr.
Castle pursuant to which the Company agreed to pay Dr. Castle a total of $2.6
million in 20 quarterly installments (the "Deferred Compensation Agreement").
In June 1997, Dr. Castle and the Company amended the Deferred Compensation
Agreement (i) postponing the payment of any scheduled payments under the
Deferred Compensation Agreement until the earlier of (a) the issuance of any
debt consented to by the bank the proceeds of which are applied to pay amounts
owed under the Bank Credit Facility and the Interim Financing, or the closing of
any equity offering the proceeds of which are applied to pay amounts owed under
the Bank Credit Facility and the Interim Financing, and (b) January 31, 1998, at
which time the scheduled deferred compensation payments shall become payable
beginning on the next scheduled payment date, and (ii) deferring payment of the
scheduled payments under the Deferred Compensation Agreement which were not made
on and after September 30, 1996 until the earlier of (a) the closing of an
initial public offering of the Company's common stock in which the gross
proceeds are not less than $25.0 million; provided, however, that such payments
shall only be made in the event the Company first pays any amounts owing under
the Bank Credit Facility and the Interim Financing; or (b) December 31, 2000.
Amounts not paid when scheduled under the original Deferred Compensation
Agreement bear interest at the rate of 10% per annum. See "Certain
Transactions." Approximately $526,000 of the proceeds of this offering will be
used to pay such deferred amounts owed by the Company to Dr. Castle under the
Deferred Compensation Agreement, and if the Underwriters exercise their
over-allotment option in full, the Company intends to prepay the remaining $1.9
million balance due under the Deferred Compensation Agreement. The Company has
obtained the required consents under the Bank Credit Facility to pay these
amounts.

In addition, approximately $10.4 million of the proceeds will be used to
repay the principal of and interest on the Company's 12% Senior Subordinated
Notes due 2002 held by the Pecks Investors (as hereinafter defined). Mr. Cresci,
a Director of the Company, is a Managing Director of Pecks Management Partners
Ltd., the investment advisor to the Pecks Investors. See "Certain Transactions."

13
<PAGE>
NO PRIOR MARKET FOR COMMON STOCK; VOLATILITY OF MARKET PRICE

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or if a trading market does develop, that it will continue after this
offering. The initial public offering price of the Common Stock was determined
through negotiations between the Company and the Underwriters. See
"Underwriting" for a description of the factors considered in determining the
initial public offering price. From time to time after this offering, there may
be significant volatility in the market price of the Common Stock. If the
Company is unable to operate its dental centers profitably or develop new dental
networks at a pace that reflects the expectations of the market, investors could
sell shares of Common Stock at or after the time that it becomes apparent that
such expectations may not be realized, resulting in a decrease in the market
price of the Common Stock. In addition to the operating results of the Company,
changes in earnings estimates by analysts, changes in general conditions in the
economy or the financial markets or other developments affecting the Company or
comparable companies within the dental services industry could cause the market
price of the Common Stock to fluctuate substantially. In recent years, the stock
market has experienced extreme price and volume fluctuations. This volatility
has had a significant effect on the market prices of securities issued by many
companies for reasons unrelated to their operating performance.

SHARES ELIGIBLE FOR FUTURE SALE

The market price of the Common Stock of the Company could be adversely
affected by the sale of substantial amounts of the Common Stock in the public
market following this offering. After giving effect to the shares of Common
Stock offered hereby, the closing of the Austin Acquisition, the conversion of
the Series A Convertible Preferred Stock and the Series C Convertible Preferred
Stock upon the closing of this offering (without giving effect to the conversion
of the Series B Convertible Preferred Stock), the Company will have outstanding
5,780,239 shares of Common Stock. Of these shares, the 2,500,000 shares
(2,875,000 shares if the Underwriters' over-allotment option is exercised in
full) of Common Stock sold in this offering will be freely tradeable without
restriction or limitation under the Securities Act of 1933, as amended (the
"Securities Act"), except to the extent such shares are subject to the
agreement with the Underwriters described below, and except for any shares
purchased by "affiliates," as that term is defined under the Securities Act.
The remaining 3,280,239 shares are "restricted securities" within the meaning
of Rule 144 adopted under the Securities Act ("Rule 144"). The restricted
shares were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act.

The Company, its executive officers and directors and all of the
stockholders of the Company have agreed with the Representatives not to offer,
sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for any shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives; provided however, that the Company is
permitted to issue shares of Common Stock in connection with acquisitions to
parties that agree to be bound by the same restrictions on offers and sales.
After the 180-day period, these persons will be entitled to sell, distribute or
otherwise dispose of the Common Stock, subject to the provisions of applicable
securities laws.

The Company anticipates that on the consummation of this offering, the
Company will have outstanding under the Plan and the Directors' Plan options to
purchase an aggregate of approximately 635,000 shares of Common Stock. The
Company intends to register the shares issuable upon exercise of options granted
under the Plan and the Directors' Plan and, upon such registration, such shares
will be eligible for resale in the public market without restriction, except for
directors and other affiliates of the Company who will be subject to volume
limitations under Rule 144. Following the consummation of this offering, the
Company will also continue to have outstanding the GulfStar Warrant, which is
presently exercisable for 56,579 shares of Common Stock at $11.00 per share, and
two Seller Notes, presently convertible into 69,879 shares of Common Stock at a
conversion price of $14.34 per share, all of which shares will be eligible for
resale subject to the volume, holding period and certain other limitations of
Rule 144 upon their exercise. See "Shares Eligible for Future Sale" and
"Management -- Stock Option Plans."

14
<PAGE>
CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation, Bylaws
and of Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company and
limit the price that certain investors might be willing to pay in the future for
shares of Common Stock. The Company's Certificate of Incorporation provides for
"blank check" preferred stock which may be issued without stockholder
approval, and certain provisions of the Company's Bylaws restrict the right of
the stockholders to call a special meeting of stockholders, to nominate
directors, to submit proposals to be considered at stockholders' meetings and to
adopt amendments to the Bylaws. The Company also is subject to Section 203 of
the Delaware General Corporation Law which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
See "Description of Capital Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION

The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock in the amount of $12.53 per share. See "Dilution." In
the event the Company issues additional Common Stock in the future, including
shares that may be issued in connection with future acquisitions, purchasers of
Common Stock in this offering may experience further dilution in the net
tangible book value per share of the Common Stock of the Company.

15
<PAGE>
THE COMPANY

Castle Dental Centers, Inc., a Delaware corporation, is a holding company
that conducts its business through wholly-owned subsidiaries. The Company's
executive offices are located at 1360 Post Oak Boulevard, Suite 1300, Houston,
Texas 77056, and its telephone number is (713) 513-1400.

The Company was formed in 1981 by Jack H. Castle, D.D.S. and Jack H.
Castle, Jr., as a single location, multi-specialty dental practice in Houston,
Texas. From 1982 through July 1997, the Company expanded to a total of 11
locations with 39 dentists in the Houston metropolitan area. During this period
the Company developed, implemented and refined the integrated dental network
approach which it intends to utilize as a basis for its national expansion.

Effective December 31, 1995, as part of a reorganization and
recapitalization plan (collectively with the financing arrangements discussed in
the following paragraph, the "Reorganization"), the Company merged with and
succeeded to the business of Family Dental. At the same time, the Company
acquired all of the outstanding stock and certain assets of Jack H. Castle,
D.D.S., Inc. and entered into a management services agreement with a
newly-established professional corporation, Jack H. Castle, D.D.S., P.C., which
succeeded to the dental practice of the professional corporation acquired by the
Company. See Notes 1 and 2 to the Company's Financial Statements and "Certain
Transactions."

In connection with the Reorganization, the Company entered into a
Securities Purchase Agreement with the Pecks Investors (the "Securities
Purchase Agreement") pursuant to which the Company issued 1,244,737 shares of
Series A Convertible Preferred Stock and $7.5 million of Senior Subordinated
Notes. At the same time, the Company entered into the Bank Credit Facility (as
hereinafter defined), which provided for a term loan of $6.0 million and a
revolving credit facility of $3.0 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

In May 1996, the Company acquired the assets of and entered into long-term
management services agreements with 1st Dental Care, P.A., a dental practice
with 11 locations in the Tampa/Clearwater, Florida area ("1st Dental Care"),
and Mid-South Dental Centers, P.C., a dental practice with six dental centers in
various locations in Tennessee ("Mid-South Dental Centers"). In August 1996,
the Company increased its dental practices under management in Texas by
acquiring Horizon Dental Centers, a dental practice with four dental centers in
Fort Worth, Texas and four dental centers in Austin, Texas (collectively with
the acquisition of 1st Dental Care and Mid-South Dental Centers, the "Completed
Acquisitions"). In June 1997, the Company entered into a management services
agreement with and agreed to acquire SW Dental Associates, LC, a dental practice
that operates four dental centers in the Austin, Texas metropolitan area ("SW
Dental"). The Austin Acquisition is referred to together with the Completed
Acquisitions as the "Acquisition Transactions." The closing of the Austin
Acquisition is a condition to, and will occur contemporaneously with, the
consummation of this offering.

The consideration for the Completed Acquisitions consisted of approximately
$9.3 million in cash, $894,000 in assumed debt and capital lease obligations,
$4.5 million in Seller Notes and 331,996 shares of the Company's Common Stock.
The consideration for the Austin Acquisition consists of approximately $5.2
million in cash, $1.5 million of which has already been paid, and 119,231 shares
of the Company's Series B Convertible Preferred Stock. The Company will also
assume approximately $412,000 of long-term debt and capital lease obligations in
connection with the Austin Acquisition.

16
<PAGE>
USE OF PROCEEDS

The net proceeds from the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby are estimated to be approximately $28.5 million
(approximately $33.1 million if the Underwriters' over-allotment option is
exercised in full) after deducting the underwriting discount and estimated
offering expenses.

The Company intends to use $3.7 million of the net proceeds of this
offering to fund the cash portion of the purchase price of the Austin
Acquisition. The Company also intends to use approximately $10.4 million of the
net proceeds to repay the principal of and accrued interest on the Company's 12%
Senior Subordinated Notes due in 2002 (the "Senior Subordinated Notes"), $7.5
million of which were issued by the Company in December 1995 to provide funds
for the Reorganization and the acquisition of affiliated dental practices and
$2.0 million of which were issued in June 1997. In connection with the
Reorganization, the Company paid $6.0 million to Jack H. Castle, D.D.S. to
acquire a dental practice owned by Dr. Castle.

The Company intends to use approximately $9.5 million of the net proceeds
to repay a portion of the total indebtedness outstanding under the Amended and
Restated Credit Agreement (the "Bank Credit Facility") between the Company and
its bank which was incurred to finance certain of the Company's acquisitions.
The Bank Credit Facility, as amended, provides for a term loan, revolving credit
facility and advancing term loan which expire or mature, as applicable, on
January 31, 1998, and bear interest at variable rates which are based upon the
bank's base rate plus a margin which varies according to whether the loan is a
term loan or revolving credit loan. As of July 31, 1997, the interest rate on
the term loan was 10.0% and the interest rate on the revolving credit loan was
9.5%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 2 to the
Company's Financial Statements included elsewhere in this Prospectus for a
description of the interest rate and other terms of the Bank Credit Facility.

Approximately $4.4 million of the net proceeds will be used to retire
seller financed subordinated debt issued by the Company to acquire affiliated
dental practices ("Seller Notes"). The Seller Notes mature at various times
from May 2001 to August 2001, and are accelerated at the closing of this
offering. Each of the Seller Notes bears interest at 10% per annum. Included in
the Seller Notes to be retired is an aggregate of $943,363 of the Seller Notes
which are convertible prior to the payment of such Seller Notes at the option of
the holder into shares of the Company's Common Stock at a conversion price of
$14.34 per share, subject to antidilution adjustments and automatic annual
increases in conversion price.

Approximately $526,000 of the proceeds will be used to pay amounts owed by
the Company to Jack H. Castle, D.D.S. pursuant to a Deferred Compensation
Agreement with Dr. Castle, effective as of December 18, 1995, which agreement
provides for quarterly payments in the amount of $131,500 to be made to Dr.
Castle until December 31, 2000 in respect of compensation not paid to Dr. Castle
prior to the acquisition of Jack H. Castle, D.D.S., Inc. The Deferred
Compensation Agreement with Dr. Castle was entered into in connection with the
acquisition by the Company of the non-dental assets of Jack H. Castle, D.D.S.,
Inc. in December 1995, of which Dr. Castle was the sole owner. In June 1997, Dr.
Castle and the Company amended the Deferred Compensation Agreement (i)
postponing the payment of any scheduled payments under the Deferred Compensation
Agreement until the earlier of (a) the issuance of any debt consented to by the
bank the proceeds of which are applied to pay amounts owed under the Bank Credit
Facility and the Interim Financing or the closing of any equity offering the
proceeds of which are applied to pay amounts owed under the Bank Credit Facility
and the Interim Financing and (b) January 31, 1998, at which time the scheduled
deferred compensation payments shall become payable beginning on the next
scheduled payment date, and (ii) deferring payment of the scheduled payments
under the Deferred Compensation Agreement which were not made from September 30,
1996 until the earlier of (a) the closing of an initial public offering of the
Company's Common Stock in which the gross proceeds are not less than $25.0
million; provided, however, that such payments shall only be made in the event
the Company first pays any amounts owing under the Bank Credit Facility and the
Interim Financing; or (b) December 31, 2000. Amounts not paid when scheduled
under the original Deferred Compensation Agreement bear interest at the rate of
10% per annum. Following the closing of this offering and the payment of the
deferred amounts, the Company intends to make quarterly payments to Dr. Castle
in the amount of $131,500 for the remainder of the term of the Deferred
Compensation Agreement. In the event the Underwriters exercise their
over-allotment option

17
<PAGE>
in full, the Company intends to prepay the remaining $1.9 million balance due
under the Deferred Compensation Agreement. The Company has obtained all consents
required under the Bank Credit Facility to apply the proceeds of the offering as
described above.

DIVIDEND POLICY

The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. It is the present intention of the
Board of Directors to reinvest all earnings in the business of the Company to
support the future growth of its operations. The Bank Credit Facility currently
prohibits the payment of cash dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DILUTION

The net tangible book value of the Company at June 30, 1997, was a deficit
of approximately $(20.0) million, or $(8.57) per share of Common Stock. Net
tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by the number of shares of
Common Stock issued and outstanding. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in this offering and the pro forma net tangible book
value per share of Common Stock immediately after completion of this offering.
After giving effect to the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the consummation of the Austin Acquisition, the pro forma
net tangible book value of the Company as of June 30, 1997 would have been
approximately $2,701,000 or $0.47 per share. This represents an immediate
increase in pro forma net tangible book value of $9.04 per share to stockholders
as of June 30, 1997, consisting of $10.16 per share attributable to this
offering offset by a decrease of $1.12 per share attributable to the Austin
Acquisition. This results in an immediate dilution in pro forma net tangible
book value of $12.53 per share to purchasers of Common Stock in this offering.
The following table illustrates the dilution per share:

Initial public offering price per
share................................ $ 13.00
---------
Net deficit book value per share
as of June 30, 1997............ $ (8.57)
Increase in net tangible book
value per share attributable to
this offering.................. 10.16
Decrease in net tangible book
value per share attributable to
the Austin Acquisition......... (1.12)
---------
Pro forma net tangible book value per
share after this offering.......... 0.47
---------
Dilution per share to purchasers of
Common Stock in this offering...... $ 12.53
=========

The following table shows, on a pro forma basis as of June 30, 1997, the
difference between existing stockholders (including shares issued upon
conversion of the Series A Convertible Preferred Stock and the Series C
Convertible Preferred Stock) and purchasers of Common Stock in this offering
with respect to the number of shares purchased from the Company, the aggregate
cash consideration paid (based, in the case of purchasers of Common Stock in
this offering, on the initial public offering price) and the average price per
share paid to the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 3,280,239 56.7% $ 7,490,000 18.7% $ 2.28
New investors............ 2,500,000 43.3 32,500,000 81.3 13.00
----------- ------- -------------- -------
Total.................... 5,780,239 100.0% $ 39,990,000 100.0%
=========== ======= ============== =======
</TABLE>
The foregoing tables assume no exercise of outstanding options or warrants.
As of the closing of this offering, there will be approximately 635,000 shares
of Common Stock issuable upon the exercise of stock options granted to certain
officers, directors, key employees of the Company and other eligible
participants under the Plan and the Directors' Plan. The exercise prices of such
options range from $10.00 to the initial public offering price per share.
Additionally, the Company has outstanding two Seller Notes convertible prior to
the payment of such Seller Notes into an aggregate of 69,879 shares of Common
Stock at a conversion price of $14.34 per share, a warrant to purchase 56,579
shares of Common Stock at an exercise price of $11.00 per share, and 119,231
shares of Series B Convertible Preferred Stock convertible into 119,231 shares
of Common Stock, all of which are subject to adjustment on the occurrence of
certain events.

18
<PAGE>
CAPITALIZATION

The following table sets forth (i) the capitalization of the Company as of
June 30, 1997, and (ii) the pro forma capitalization as of June 30, 1997, giving
effect to the Austin Acquisition as if such transaction had occurred as of such
date, as adjusted to give effect to the sale of the shares of Common Stock
offered by the Company hereby, the application of the net proceeds therefrom as
described under "Use of Proceeds," the issuance of an aggregate of 948,243
shares of Common Stock upon conversion of the Series A Convertible Preferred
Stock and the Series C Convertible Preferred Stock, and the issuance of 119,231
shares of Series B Convertible Preferred Stock in connection with the Austin
Acquisition as if each of such events had occurred as of June 30, 1997.

JUNE 30, 1997
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Current portion of long-term debt and
capital lease obligations.......... $ 12,737 $ 880
========= ===========
Long-term debt and capital lease
obligations, less current
portion............................ $ 10,327 $ 3,049
Redeemable Preferred Stock, $0.001
par value; 1,244,737 shares of
Series A, issued and outstanding
actual; no shares issued and
outstanding pro forma as
adjusted(1)........................ 3,228 --
Redeemable Preferred Stock, $0.001
par value, 119,231 shares of Series
B issued and outstanding pro forma
as adjusted(2)..................... -- 1,550
Redeemable Preferred Stock, $0.001
par value, 485,382 shares of Series
C issued and outstanding actual, no
shares issued and outstanding pro
forma, as adjusted(3).............. 1,153 --
Stockholders' equity (deficit):
Common Stock, $0.001 par value;
30,000,000 shares authorized;
2,331,996 shares issued and
outstanding actual, and
5,780,239 issued and outstanding
pro forma as adjusted(4)........ 2 6
Additional paid-in capital......... 3,107 36,009
Accumulated deficit(5)............. (7,007) (10,759)
--------- -----------
Total stockholders' equity
(deficit)...................... (3,898) 25,256
--------- -----------
Total capitalization....... $ 10,810 $ 29,855
========= ===========

- ------------

(1) Represents the Series A Convertible Preferred Stock which will be converted
into 705,552 shares of Common Stock upon consummation of this offering. See
"Description of Capital Stock."

(2) Represents the Series B Convertible Preferred Stock which is convertible
into 119,231 shares of Common Stock, one year after the consummation of this
offering at the option of the holder.

(3) Represents the Series C Convertible Preferred Stock which will be converted
into 242,691 shares of Common Stock upon consummation of this offering. See
"Description of Capital Stock."

(4) Excludes an aggregate of approximately 880,689 shares issuable on (i) the
exercise of options to purchase an aggregate of approximately 635,000 shares
of Common Stock which the Company will have granted at the consummation of
this offering under the Plan and the Directors' Plan; (ii) the exercise of
the GulfStar Warrant for an aggregate of 56,579 shares, (iii) the conversion
of two Seller Notes into 69,879 shares of Common stock, and (iv) the
conversion of the Series B Convertible Preferred Stock into 119,231 shares
of Common Stock.

(5) Pro forma deficit has been increased for $3.8 million unamortized discount
and debt offering costs relating to long-term debt that will be repaid upon
consummation of this offering. The unamortized discount will be included as
an extraordinary loss in the period in which the debt is repaid.

19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected historical financial data of the Company should be read in
conjunction with the related financial statements, notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The selected historical
financial data set forth below as of December 31, 1994, 1995 and 1996 and for
each of the periods ended December 31, 1993, 1994, 1995 and 1996 have been
derived from the audited financial statements of the Company, and its combined
predecessor companies, for such periods. The selected historical financial data
set forth below as of June 30, 1997 and for the six months ended June 30, 1996
and 1997 have been derived from the Company's unaudited condensed consolidated
financial statements, included elsewhere herein, which were prepared on the same
basis as the audited financial statements and which, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the information set forth below. The selected
historical financial data as of December 31, 1992 and 1993 and for the year
ended December 31, 1992 have been derived from the Company's financial records,
which were prepared on the same basis as the audited financial statements and
which, in the opinion of management, include all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the information set
forth below. The selected pro forma financial data set forth below as of June
30, 1997 and for the year ended December 31, 1996 and for the six months ended
June 30, 1997 have been derived from the unaudited pro forma financial
statements of the Company. The pro forma statement of operations data give
effect to (i) the issuance of $2.0 million in Senior Subordinated Notes, (ii)
the sale of 2,500,000 shares of Common Stock offered by the Company hereby and
the application of net proceeds therefrom as described under "Use of Proceeds"
and (iii) the Acquisition Transactions as if each of such transactions had
occurred as of January 1, 1996. The pro forma balance sheet data give effect to
(i) the sale of 2,500,000 shares of Common Stock offered by the Company hereby
and the application of net proceeds therefrom as described under "Use of
Proceeds," (ii) the conversion of the Series A Convertible Preferred Stock and
the Series C Convertible Preferred Stock into an aggregate of 948,243 shares of
Common Stock, and (iii) the Austin Acquisition and the issuance of 119,231
shares of Series B Convertible Preferred Stock, as if each of such transactions
had occurred as of June 30, 1997. The selected pro forma financial data are not
necessarily indicative of the actual results of operations or financial position
that would have been achieved had such transactions and this offering been
completed at the dates specified, nor are the statements necessarily indicative
of the Company's future results of operations or financial position. See
"Unaudited Pro Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------------- --------------------
PRO FORMA
(1)(2)
1992 1993 1994 1995 1996 1996 1996 1997
--------- --------- --------- --------- --------- ---------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
<S> <C> <C> <C> <C> <C> <C> <C> <C>
practices(3).......................... $ 13,978 $ 15,053 $ 17,083 $ 18,257 $ 29,601 $ 42,569 $ 10,707 $ 21,327
Amounts retained by affiliated
dental practices(3)................... -- -- -- -- 9,981 11,851 3,386 6,954
--------- --------- --------- --------- --------- ---------- --------- ---------
Net revenues(3)......................... 13,978 15,053 17,083 18,257 19,620 30,718 7,321 14,373
Expenses:
Dentists' salaries(3)................. 2,223 2,684 2,853 3,345 -- -- -- --
Professional fees & clinic
expenses(4)......................... -- -- -- -- -- 1,997 -- --
Clinical salaries..................... 946 1,529 1,811 1,879 4,233 7,178 1,359 2,781
Dental supplies and laboratory fees... 1,403 1,565 1,907 2,185 3,120 4,231 1,351 1,967
Rental and lease expense.............. 411 504 681 836 1,592 2,266 490 1,258
Advertising and marketing............. 580 729 1,062 959 1,522 2,034 533 1,031
Depreciation and amortization......... 193 245 309 336 1,088 1,780 334 963
Other operating expenses.............. 1,915 1,871 2,205 2,260 2,913 3,818 1,045 1,784
General and administrative(5)......... 5,085 4,947 5,319 9,109 4,292 5,808 1,200 3,047
--------- --------- --------- --------- --------- ---------- --------- ---------
Total expenses.................... 12,756 14,074 16,147 20,909 18,760 29,112 6,312 12,831
--------- --------- --------- --------- --------- ---------- --------- ---------
Operating income (loss)................. 1,222 979 936 (2,652) 860 1,606 1,009 1,542
Interest expense........................ 182 130 112 87 2,596 433 1,065 1,683
Other income(6)......................... -- -- -- -- (89) (89) (106) (12)
--------- --------- --------- --------- --------- ---------- --------- ---------
Income (loss) before income taxes....... 1,040 849 824 (2,739) (1,647) 1,262 50 (129)
Provision (benefit) for income taxes.... -- 40 43 (325) (561) 430 19 (49)
--------- --------- --------- --------- --------- ---------- --------- ---------
Net income (loss)(7).................... 1,040 809 781 (2,414) (1,086) 832 31 (80)
Preferred stock dividends(8)............ -- -- -- -- -- -- -- (309)
--------- --------- --------- --------- --------- ---------- --------- ---------
Net income (loss) attributable to common
stock................................. $ 1,040 $ 809 $ 781 $ (2,414) $ (1,086) $ 832 $ 31 $ (389)
========= ========= ========= ========= ========= ========== ========= =========
Net income (loss) per share(9).......... $ (0.30) $ 0.14 $ 0.01 (0.10)
========= ========== ========= =========
Weighted average outstanding
shares(9)............................. 3,598 5,745 3,020 3,770
</TABLE>
PRO FORMA
(1)(2)
1997
----------
STATEMENT OF OPERATIONS DATA:
Patient revenues of affiliated dental
practices(3).......................... $ 23,950
Amounts retained by affiliated dental pr 7,605
----------
Net revenues(3)......................... 16,345
Expenses:
Dentists' salaries(3)................. --
Professional fees & clinic
expenses(4)......................... --
Clinical salaries..................... 3,533
Dental supplies and laboratory fees... 2,313
Rental and lease expense.............. 1,316
Advertising and marketing............. 1,120
Depreciation and amortization......... 1,125
Other operating expenses.............. 1,958
General and administrative(5)......... 3,361
----------
Total expenses.................... 14,726
----------
Operating income (loss)................. 1,619
Interest expense........................ 187
Other income(6)......................... (12)
----------
Income (loss) before income taxes....... 1,444
Provision (benefit) for income taxes.... 549
----------
Net income (loss)(7).................... 895
Preferred stock dividends(8)............ --
----------
Net income (loss) attributable to common
stock................................. $ 895
==========
Net income (loss) per share(9).......... $ 0.16
==========
Weighted average outstanding
shares(9)............................. 5,745

20
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, ------------------------
----------------------------------------------------- PRO FORMA AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(10)
--------- --------- --------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 292 $ 34 $ 22 $ 6,439 $ 79 $ 1,488 $ 2,311
Working capital......................... 2,247 773 1,212 6,208 (3,244) (11,978) 2,578
Total assets............................ 5,087 4,130 4,711 12,677 29,167 32,167 37,597
Long-term debt and capital lease
obligations, less current portion..... 785 496 162 9,462 18,951 10,327 3,049
Redeemable preferred stock(11).......... -- -- -- 2,928 2,928 4,381 1,550
Total stockholders' equity (deficit).... 2,631 1,796 2,577 (5,743) (3,509) (3,898) 25,256
</TABLE>
- ------------

(1) Gives effect to (i) the issuance of $2.0 million in Senior Subordinated
Notes in June 1997, (ii) the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby and the application of the net proceeds
therefrom as described under "Use of Proceeds," and (iii) the Acquisition
Transactions, as if each of such transactions had occurred as of January 1,
1996. See "Unaudited Pro Forma Consolidated Financial Information."

(4) Represents preacquisition operating costs that an acquired dental practice
paid to its affiliated dentists for dentist compensation, clinical
salaries, dental supplies and laboratory fees.

(5) In 1995, the Company expensed $2.6 million of deferred compensation in
connection with the Reorganization.

(6) Represents primarily gain or loss on sale of assets and interest income.

(7) Prior to the Reorganization, significant operations of the Company were
conducted through a subchapter S corporation and accordingly were not
subject to federal and state income taxes (see Notes 2 and 8 to the
Company's Audited Financial Statements). If all of the Company's operations
had been subject to income taxes, net income (loss) would have been
$660,000, $546,000, $515,000 and ($1.7 million) for the years ended
December 31, 1992, 1993, 1994 and 1995, respectively. Subsequent to
December 31, 1995, the Company's operations are subject to income taxes and
such taxes have been reflected in the historical consolidated statement of
operations data for the year ended December 31, 1996. See "Unaudited Pro
Forma Consolidated Financial Information."

(9) Shares used in calculating net income per share for the year ended December
31, 1996 and the six months ended June 30, 1997 include the weighted
average outstanding shares plus the number of shares, the proceeds of which
would be necessary to repay the portion of the Company's debt that funded
the $6.0 million payment to Jack H. Castle, D.D.S. in connection with the
Reorganization. See "Unaudited Pro Forma Consolidated Financial
Information" and "Certain Transactions."

(10) Gives effect to (i) the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds," (ii) the conversion of the Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock into
an aggregate of 948,243 shares of Common Stock, and (iii) the Austin
Acquisition, and the issuance of 119,231 shares of Series B Convertible
Preferred Stock, as if such transactions had occurred as of June 30, 1997.

21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements, Unaudited Condensed Consolidated Interim Financial
Statements and the Notes thereto included elsewhere in this Prospectus.

OVERVIEW

The Company manages group dental practices in Texas, Florida and Tennessee.
Since its founding in 1981 with the opening of a single dental office in
Houston, the Company has expanded through DE NOVO development of dental centers
and, since 1996, the acquisition of group dental practices. At August 1, 1997,
the Company managed 40 dental centers with 108 affiliated dentists,
orthodontists and other dental specialists, with four additional dental centers
in various stages of development.

In the period from 1981 through 1995, the Company operated only in Houston,
Texas, with a total of eight dental centers with 37 dentists at the end of 1995.
In December 1995, the Company acquired the dental practice owned by Dr. Jack H.
Castle, and entered into a management services agreement with a newly-formed
dental practice owned by Dr. Castle to manage the non-dental operations of the
dental centers in Houston. During 1996, the Company opened two DE NOVO dental
offices in Houston, resulting in a total of 10 dental centers with 39 dentists
at the end of 1996. Total patient revenues from its affiliated practice in
Houston were $18.6 million in 1996.

Beginning in the first quarter of 1996, the Company began to identify group
dental practices outside of Houston, Texas as potential acquisition candidates
with a view to expanding the Company's operations into new markets. Since May
1996, the Company has completed the acquisition of three affiliated dental
practices and in June 1997 entered into a management services agreement with and
agreed to acquire another group dental practice located in Austin, Texas. As a
result of the recent rapid expansion of the business through acquisitions and
the Company's limited period of affiliation with these practices, the Company
believes that period-to-period comparisons set forth below may not necessarily
be meaningful nor representative of future results. For additional information
regarding the pro forma financial effect of the Company's acquisitions, see
"Unaudited Pro Forma Consolidated Financial Information."

Certain of the affiliated dental practices derive a significant portion of
their revenues from managed care contracts, preferred provider arrangements and
other negotiated price agreements. While the laws of some states permit the
Company to participate in the negotiations by affiliated dental practices of
managed care contracts, preferred provider arrangements and other negotiated
price agreements, the affiliated dental practices are the contracting parties
for all such relationships, and the Company is dependent on its affiliated
dental practices for the success of such relationships. See "Risk
Factors -- Risks Associated with Managed Care Contracts; Capitated Fee Revenue"
and "-- Reliance on Affiliated Dental Practices," and "Business -- Dental
Network Development -- Management Services Agreement."

ACQUISITION AND AFFILIATION SUMMARY

Since May 1, 1996, the Company has acquired certain assets of and entered
into long-term management services agreements with 1st Dental Care, Mid-South
Dental Centers and Horizon Dental Centers, three affiliated dental practices
that have expanded its market presence into the Tampa/Clearwater area in
Florida, the Nashville and Chattanooga areas in Tennessee, and the Austin and
Fort Worth areas in Texas, respectively. The Completed Acquisitions resulted in
the addition of 25 dental centers with 60 affiliated dentists. In addition, the
Company has entered into a management services agreement with and has agreed to
acquire SW Dental in Austin, Texas. The purchase price for the Austin
Acquisition is $5.2 million in cash and 119,231 shares of Series B Convertible
Preferred Stock. See "Description of Capital Stock -- Preferred Stock." The
Company will also assume debt obligations of $412,000 in connection with the
Austin Acquisition. Non-refundable payments of $1.5 million have been made in
connection with the Austin Acquisition, and $3.7 million in cash is due at
closing. The closing of the Austin Acquisition is a condition to, and will occur
contemporaneously with, the closing of this offering.

22
<PAGE>
The aggregate consideration for the Completed Acquisitions consisted of
approximately $9.3 million in cash, $894,000 of assumed debt, $4.5 million in
Seller Notes and 331,996 shares of Common Stock. An aggregate of $943,363 of the
Seller Notes is convertible into Common Stock prior to the time such Seller
Notes are paid at a current conversion price of $14.34 per share, subject to
antidilution adjustments and automatic annual increases in conversion price.

The Company currently is in discussions with a number of dentists and
owners of group dental practices concerning the potential for future affiliation
with the Company. Other than the Austin Acquisition, the Company presently does
not have any letters of intent or binding agreements for the acquisition of
dental practices and there can be no assurance that these discussions will
result in new practice affiliations in the near future or at all.

COMPONENTS OF REVENUES AND EXPENSES

Patient revenues from affiliated dental practices represent amounts billed
by the affiliated dental practices to patients and third-party payors for dental
services rendered. Such amounts also include monthly capitation payments
received from third-party payors pursuant to managed care contracts. Amounts
retained by group dental practices include compensation paid to dentists,
hygienists and other dental care personnel employed by the affiliated dental
practices, as well as other costs directly incurred by the affiliated practices
such as employment taxes, personnel benefits and insurance costs. Net revenues
represent amounts earned by the Company under the terms of its management
services agreements with the affiliated dental practices, which generally equal
patient revenues less amounts retained by the affiliated practices. The
Company's net revenues, therefore, are dependent upon patient revenues realized
by the affiliated practices as well as compensation and other expenses of the
affiliated practices.

Under the terms of the typical management services agreement with an
affiliated dental practice, the Company becomes the exclusive manager and
administrator of all non-dental services relating to the operation of the
practice. The obligations of the Company include assuming responsibility for the
operating expenses incurred in connection with managing the dental centers.
These expenses include salaries, wages and related costs of non-dental
personnel, dental supplies and laboratory fees, rental and lease expenses,
advertising and marketing costs, management information systems, and other
operating expenses incurred at the dental centers. In addition to these
expenses, the Company incurs general and administrative expenses related to the
billing and collection of accounts receivable, financial management and control
of the dental operations, insurance, training and development, and other general
corporate expenditures. As compensation for its services under the typical
management services agreement and subject to applicable law, the Company is paid
a management fee comprised of three components: (i) the costs incurred by it on
behalf of the affiliated practice; (ii) a base management fee in an amount
ranging from 12.5% to 15.0% of adjusted gross revenues; and (iii) a performance
fee equal to the patient revenues of the affiliated dental practice less (a) the
expenses of the affiliated dental practice and (b) the sum of (i) and (ii).

RESULTS OF OPERATIONS

In December 1995, the Company was reorganized as a Delaware corporation and
acquired the assets of the professional corporation, owned by Dr. Jack H.
Castle, which provided dental services in Houston. Prior to the Reorganization,
therefore, the financial results of the Company and the professional corporation
have been combined for the fiscal years prior to 1996. In 1996, the Company
acquired the assets of three group dental practices. As a result of these
transactions, the Company believes that the period-to-period comparisons set
forth below may not be meaningful.

The following table sets forth the percentages of patient revenues
represented by certain items reflected in the Company's Statements of
Operations. The information that follows represents the historical results of
the Company and does not include pre-acquisition results of the dental practices
that the Company has acquired, nor any results of the Austin Acquisition
discussed herein. The information that follows should be read in conjunction
with the Financial Statements of the Company and notes thereto, as well as the
Unaudited Pro Forma Consolidated Financial Information, included elsewhere in
this Prospectus.

23
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Patient revenues of affiliated dental
practices.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Amounts retained by affiliated dental
practices.......................... -- -- 33.7 31.6 32.6
--------- --------- --------- --------- ---------
Net revenues......................... 100.0 100.0 66.3 68.4 67.4
Expenses:
Dentists' salaries................. 16.7 18.3 -- -- --
Clinical salaries.................. 10.6 10.3 14.3 12.7 13.1
Dental supplies and laboratory
fees............................ 11.2 12.0 10.5 12.6 9.2
Rental and lease expense........... 4.0 4.6 5.4 4.6 5.9
Advertising and marketing.......... 6.2 5.3 5.1 5.0 4.8
Depreciation and amortization...... 1.8 1.8 3.7 3.1 4.5
Other operating expenses........... 12.9 12.4 9.8 9.8 8.4
General and administrative......... 31.1 49.9 14.6 11.2 14.3
--------- --------- --------- --------- ---------
Total expenses............. 94.5 114.6 63.4 59.0 60.2
--------- --------- --------- --------- ---------
Operating income (loss).............. 5.5 (14.6) 2.9 9.4 7.2
Interest expense..................... 0.7 0.5 8.8 9.9 7.9
Other expense (income)............... -- -- (0.3) (1.0) (0.1)
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... 4.8 (15.1) (5.6) 0.5 (0.6)
Provision (benefit) for income
taxes.............................. 0.3 (1.8) (1.9) 0.2 (0.2)
--------- --------- --------- --------- ---------
Net income (loss).................... 4.5% (13.3)% (3.7)% 0.3% (0.4)%
========= ========= ========= ========= =========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996

The Company acquired the assets of and entered into management agreements
with three group dental practices during the period from May through August
1996, the results of which are included in the Company's operating results from
the dates of acquisition. Changes in results of operations for the six-month
period ended June 30, 1997 compared to the six-month period ended June 30, 1996
were caused primarily by these acquisitions. For periods prior to May 1996, the
Company's operations were conducted entirely in Houston, Texas.

PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $10.7 million for the six months
ended June 30, 1996 to $21.3 million for the six months ended June 30, 1997, an
increase of $10.6 million or 99.2%. Approximately $10.2 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $9.3 million in the first half of 1996 to $9.8 million in the
first six months of 1997, primarily the result of the opening of two new dental
centers in Houston in April 1996 and December 1996.

AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES -- For the six months ended
June 30, 1997, amounts retained by affiliated dental practices were $7.0
million, an increase of $3.6 million, or 105.4%, from the comparable period in
1996. The acquired dental practices accounted for nearly all of the increase.
Expressed as a percentage of patient revenues, amounts retained by affiliated
dental practices increased from 31.6% to 32.6% for the six month periods ended
June 30, 1996 and 1997, respectively, as the Completed Acquisitions had
relatively higher compensation paid to dentists and other dental professionals
than the affiliated dental practice in Houston.

NET REVENUES -- For the six months ended June 30, 1997, net revenues were
$14.4 million, an increase of $7.1 million, or 96.3%, from the six-month period
ended June 30, 1996. The increase is attributable to net revenues of the
Completed Acquisitions.

CLINICAL SALARIES -- Clinical salaries increased from $1.4 million for the
six months ended June 30, 1996 to $2.8 million for the six months ended June 30,
1997, an increase of $1.4 million or 105%. The

24
<PAGE>
Completed Acquisitions accounted for all of the increase in clinical employee
salaries. Expressed as a percentage of patient revenues, clinical salaries
increased from 12.7% to 13.1% for the six-month periods ended June 30, 1996 and
1997, respectively.

DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $1.4 million for the six months ended June 30, 1996 to $2.0
million for the six months ended June 30, 1997, an increase of $616,000 or
45.5%. This increase was attributed to the Completed Acquisitions, which
accounted for $1.0 million in dental supplies and laboratory expenses. Dental
supplies and laboratory expenses in the Houston market decreased from $1.2
million to $943,000 in the first six months of 1996 and 1997, respectively,
primarily resulting from the outsourcing of the Company's purchasing and
inventory control functions in Houston in mid 1996. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees decreased from 12.6% in
the first six months of 1996 to 9.2% in the first six months of 1997.

RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$490,000 for the six months ended June 30, 1996 to $1.3 million for the six
months ended June 30, 1997, an increase of $768,000, or 156.7%. Rental expense
from the acquisitions in Florida, Tennessee and Texas accounted for $629,000 of
the increase, with the remainder resulting from the opening of two new dental
centers in Houston. Expressed as a percentage of patient revenues, rental and
lease expense increased from 4.6% in the first half of 1996 to 5.9% in the first
half of 1997, as the Completed Acquisitions had relatively higher percentage
rental and lease expense than the Houston operation.

ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $533,000 for the six months ended June 30, 1996 to $1.0 million for the six
months ended June 30, 1997, an increase of $498,000, or 93%. The Completed
Acquisitions accounted for $466,000 of the increase. Expressed as a percentage
of patient revenues, advertising and marketing costs decreased from 5.0% to 4.8%
for the six-month periods ended June 30, 1996 and 1997, respectively.

DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $334,000 for the six months ended June 30, 1996 to $963,000 for the six
months ended June 30, 1997, an increase of approximately $629,000, primarily
resulting from the Completed Acquisitions and amortization of deferred loan
costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles resulting from the Completed Acquisitions was
$336,000 in the first six months of 1997. As a percentage of patient revenues,
depreciation and amortization increased from 3.1% to 4.5% for the six-month
periods ended June 30, 1996 and 1997, respectively.

OTHER OPERATING EXPENSES -- Other operating expenses increased from $1.0
million for the six months ended June 30, 1996 to $1.8 million for the six
months ended June 30, 1997, an increase of approximately $739,000 or 70.7%.
Other operating expenses include certain expenses related to the operation of
the Company's dental centers and bad debt expense incurred in the financing of
patient receivables at the affiliated dental practices. The Completed
Acquisitions accounted for approximately $600,000 of the increase in other
operating expenses. Expressed as a percentage of patient revenues, other
operating expenses decreased from 9.8% to 8.4% for the six-month periods ended
June 30, 1996 and 1997, respectively, primarily due to the lower percentage of
bad debt expense of the Completed Acquisitions as compared to the Houston dental
centers.

GENERAL AND ADMINISTRATIVE -- General and administrative expense increased
from $1.2 million for the six months ended June 30, 1996 to $3.0 million for the
six months ended June 30, 1997, an increase of approximately $1.8 million or
153.9%. The increase resulted from the addition of general and administrative
expenses of the Completed Acquisitions and increased personnel and general
corporate expenses at the Company's headquarters in Houston. Expressed as a
percentage of patient revenues, general and administrative expense increased
from 11.2% to 14.3% for the six-month periods ended June 30, 1996 and 1997,
respectively.

INTEREST EXPENSE -- Interest expense increased from $1.1 million for the
six months ended June 30, 1996 to $1.7 million for the six months ended June 30,
1997, an increase of $618,000 or 58.0%. Increased

25
<PAGE>
borrowings related to the Completed Acquisitions resulted in higher interest
expense. Expressed as a percentage of patient revenues, however, interest
expense decreased from 9.9% to 7.9% for the six-month periods ended June 30,
1996 and 1997, respectively, primarily resulting from the relatively greater
percentage increase in patient revenues from the prior year period.

INCOME TAXES -- For the six months ended June 30, 1997, the Company
recorded a benefit for income taxes of $49,000 resulting from the loss before
taxes of $129,000 for the period. In the first six months of 1996, the provision
for income taxes was $19,000 on income before taxes of $50,000.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

PATIENT REVENUES OF AFFILIATED DENTAL PRACTICES -- Patient revenues of
affiliated dental practices increased from $18.3 million for the year ended
December 31, 1995 to $29.6 million for the year ended December 31, 1996, an
increase of $11.3 million or 62.1%. Approximately $11.0 million of the increase
was attributable to the Completed Acquisitions. Patient revenues in Houston
increased from $18.3 million in 1995 to $18.6 million in 1996, primarily the
result of the opening of the Company's ninth dental center in Houston in April
1996.

AMOUNTS RETAINED BY AFFILIATED DENTAL PRACTICES -- For the year ended
December 31, 1996, amounts retained by affiliated dental practices were $10.0
million, or 33.7% of patient revenues. For the year ended December 31, 1995,
compensation paid to dental professionals was classified as dentist salaries and
clinical salaries. The Company estimates that amounts retained by the affiliated
dental practice in 1995, calculated on a basis comparable to 1996, was $5.2
million, or 28.6% of patient revenues. The percentage increase from 1995 to 1996
resulted from the relatively higher percentage of dentist and clinical salaries
from the Completed Acquisitions.

NET REVENUES -- Net revenues of $19.6 million for the year ended December
31, 1996 represent management fees earned by the Company in accordance with
management services agreements with the affiliated practices. In periods prior
to 1996, the Company's predecessor companies, Family Dental and Jack H. Castle
D.D.S., Inc, operated as a combined entity, and did not distinguish between
patient revenues and net revenues.

DENTISTS' SALARIES -- Compensation paid to dentists for the year ended
December 31, 1995 was $3.3 million, or 18.3% of patient revenues. Dentist
salaries in 1996, which are included in amounts retained by affiliated dental
practices, were $5.9 million, or 20% of patient revenues. Dentist salaries from
the 25 dental centers of the Completed Acquisitions accounted for $2.4 million
of the increase. The addition of one DE NOVO dental center and higher
compensation paid to dentists in Houston accounted for the balance of the
increase.

CLINICAL SALARIES -- Clinical salaries increased from $1.9 million for the
year ended December 31, 1995 to $4.2 million for the year ended December 31,
1996, an increase of $2.4 million or 125.3%. The Completed Acquisitions
accounted for the increase in clinic employee salaries. Expressed as a
percentage of patient revenues, clinical salaries increased from 10.3% to 14.3%
for the years ended December 31, 1995 and 1996, respectively, as the Completed
Acquisitions had relatively higher percentage clinical salaries costs than the
Houston operations.

DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $2.2 million for the year ended December 31, 1995 to $3.1 million
for the year ended December 31, 1996, an increase of $935,000 or 42.8%. This
increase resulted primarily from the Completed Acquisitions, which incurred $1.1
million in dental supplies and laboratory expenses. Expressed as a percentage of
patient revenues, dental supplies and laboratory fees decreased from 12.0% in
1995 to 10.5% in 1996.

RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$836,000 for the year ended December 31, 1995 to $1.6 million for the year ended
December 31, 1996, an increase of 90.4%. Rental expense from the Completed
Acquisitions accounted for nearly all of the increase. Expressed as a percentage
of patient revenues, rental and lease expense increased from 4.6% in 1995 to
5.4% in 1996, as

26
<PAGE>
the Completed Acquisitions had relatively higher percentage rental and lease
expense than the Houston operation.

ADVERTISING AND MARKETING -- Advertising and marketing expense increased
from $1.0 million for the year ended December 31, 1995 to $1.5 million for the
year ended December 31, 1996, an increase of 58.7%. The Completed Acquisitions
accounted for $420,000 of the increase. Higher expenditures for television
advertising and direct mail campaigns conducted in conjunction with the opening
of two new dental centers in Houston resulted in increased advertising and
marketing costs of approximately $150,000 in Houston. Expressed as a percentage
of patient revenues, however, advertising and marketing costs decreased from
5.3% in 1995 to 5.1% in 1996.

DEPRECIATION AND AMORTIZATION -- Depreciation and amortization increased
from $336,000 for the year ended December 31, 1995 to $1.1 million for the year
ended December 31, 1996, an increase of approximately $752,000, primarily
resulting from the Completed Acquisitions and amortization of deferred loan
costs incurred in connection with the Reorganization in December 1995.
Amortization of intangibles incurred in the period following the completion of
the acquisitions was $231,000 in 1996. As a percentage of patient revenues,
depreciation and amortization increased from 1.8% to 3.7% for the years ended
December 31, 1995 and 1996, respectively.

OTHER OPERATING EXPENSES -- Other operating expenses increased from $2.3
million for the year ended December 31, 1995 to $2.9 million for the year ended
December 31, 1996, an increase of $653,000 or 28.9%. Other operating expenses
include certain expenses related to the operation of the Company's dental
centers and bad debt expense incurred in the financing of patient receivables at
the affiliated dental practices. The Completed Acquisitions accounted for all of
the increase in other operating expenses from 1995 to 1996. Expressed as a
percentage of patient revenues, other operating expenses decreased from 12.4% to
9.8% for the years ended December 31, 1995 and 1996, respectively, primarily due
to the lower percentage of bad debt expense of the Completed Acquisitions as
compared to the Houston dental centers.

GENERAL AND ADMINISTRATIVE -- General and administrative expense decreased
from $9.1 million for the year ended December 31, 1995 to $4.3 million for the
year ended December 31, 1996, a decrease of $4.8 million or 52.9%. Compensation
paid to the Company's owners was $5.3 million in 1995 including $2.6 million in
accrued deferred compensation payable to a shareholder. Compensation to
stockholders declined to $592,000 in 1996. This reduction was partially offset
by general and administrative expense of $1.2 million from the Completed
Acquisitions. In addition, the Company incurred approximately $400,000 in 1996
related to potential acquisitions that were not completed and approximately
$200,000 in personnel severance costs. Expressed as a percentage of patient
revenues, general and administrative expense decreased from 49.9% to 14.4% for
years ended December 31, 1995 and 1996, respectively.

INTEREST EXPENSE -- Interest expense increased from $87,000 for the year
ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. In
the period from December 1995 through August 1996, the Company borrowed
approximately $25.0 million in order to fund the Reorganization and the
acquisition of affiliated dental practices in Florida, Tennessee and Texas,
resulting in $2.1 million in higher interest costs in 1996. In addition, the
amortization of the discount on the Senior Subordinated Notes was $522,000 for
the year ended December 31, 1996.

INCOME TAXES -- Prior to 1996, the Company did not accrue significant
corporate income taxes because a major portion of the Company's operations were
conducted through a Subchapter S corporation. Subsequent to the Reorganization
in December 1995, all of the Company's operations became subject to corporate
income taxes. For the year ended December 31, 1996 the Company recorded a
benefit for income taxes of $561,000, related to the loss before taxes of $1.6
million for the year. At December 31, 1996, the Company had net tax loss
carryforwards of $2.1 million, which may be used in future periods to offset
taxable income.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

NET PATIENT REVENUES -- Net patient revenues increased from $17.1 million
for the year ended December 31, 1994 to $18.3 million for the year ended
December 31, 1995, an increase of $1.2 million or

27
<PAGE>
6.9%. This increase was primarily attributable to the opening of the Company's
eighth dental center in October 1994.

DENTISTS' SALARIES -- Dentists' salaries increased from $2.9 million for
the year ended December 31, 1994 to $3.3 million for the year ended December 31,
1995, an increase of $492,000 or 17.2%. The hiring of additional dentists to
staff the Company's eighth dental center and an increase in patient services
resulted in the increase in dentists' salaries. Expressed as a percentage of net
patient revenues, dentists' salaries increased from 16.7% to 18.3% for the years
ended December 31, 1994 and 1995, respectively.

CLINICAL SALARIES -- Clinical salaries increased from $1.8 million for the
year ended December 31, 1994 to $1.9 million for the year ended December 31,
1995, an increase of $68,000 or 3.8%. The increase resulted from the addition of
the eighth dental center in October 1994. Expressed as a percentage of net
patient revenues, clinical salaries decreased from 10.6% to 10.3% for the years
ended December 31, 1994 and 1995, respectively, as a result of more efficient
scheduling and the increase in net patient revenues from the eighth dental
center.

DENTAL SUPPLIES AND LABORATORY FEES -- Dental supplies and laboratory fees
increased from $1.9 million for the year ended December 31, 1994 to $2.2 million
for the year ended December 31, 1995, an increase of approximately $278,000 or
14.6%. The increased level of patient services and costs associated with the
opening of the Company's eighth center accounted for most of the increase.
Expressed as a percentage of net patient revenues, dental supplies and
laboratory expense increased from 11.2% to 12.0% for the years ended December
31, 1994 and 1995, respectively.

RENTAL AND LEASE EXPENSE -- Rental and lease expense increased from
$681,000 for the year ended December 31, 1994 to $836,000 for the year ended
December 31, 1995, an increase of $155,000 or 22.8%. The increase resulted from
the opening of the eighth dental center in late 1994, the opening of the
Company's new corporate office in April 1995, and the moving of one of the
Company's dental centers to a larger facility, which resulted in a duplication
of lease payments at the old facility through the end of 1995. Expressed as a
percentage of net patient revenues, rental and lease expense increased from 4.0%
to 4.6% for the years ended December 31, 1994 and 1995, respectively.

ADVERTISING AND MARKETING -- Advertising and marketing expense decreased
from $1.1 million for the year ended December 31, 1994 to $959,000 for the year
ended December 31, 1995, a decrease of $103,000, or 9.7%. Reduced expenditures
for television advertising and the absence of direct mail costs incurred in
connection with opening of the eighth center in the fourth quarter of 1994
resulted in lower 1995 spending. Expressed as a percentage of net patient
revenues, advertising and marketing expense decreased from 6.2% to 5.3% for the
years ended December 31, 1994 and 1995 respectively.

DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense
increased from $309,000 for the year ended December 31, 1994 to $336,000 for the
year ended December 31, 1995, an increase of $27,000 or 8.7%. Capital
expenditures incurred in the opening of the Company's eighth dental center in
the fourth quarter of 1994 and the moving of the corporate office to a new
location resulted in higher depreciation and amortization expense in 1995.

OTHER OPERATING EXPENSES -- Other operating expenses increased from $2.2
million for the year ended December 31, 1994 to $2.3 million for the year ended
December 31, 1995, an increase of $55,000, or 2.5%. Expressed as a percentage of
net patient revenues, other operating expenses decreased from 12.9% to 12.4% for
the years ended December 31, 1994 and 1995, respectively.

GENERAL AND ADMINISTRATIVE -- General and administrative expense increased
from $5.3 million for the year ended December 31, 1994 to $9.1 million for the
year ended December 31, 1995, an increase of $3.8 million or 71.3%. The increase
resulted primarily from higher compensation paid to the Company's owners,
including $2.6 million under the Deferred Compensation Agreement entered into in
connection with the Reorganization. The Company also incurred higher costs
related to the corporate office opened in mid-1995 and higher administrative
personnel costs. Expressed as a percentage of net patient revenues, general and
administrative expense increased from 31.1% to 49.9% for the years ended
December 31, 1994 and 1995, respectively.

28
<PAGE>
INCOME TAXES -- In 1995 and 1994, significant operations of the Company
were conducted through a subchapter S corporation, which resulted in no
corporate income taxes being assessed against the profits of that company.
Subsequent to the Reorganization in December 1995, all of the Company's
operations became subject to corporate income taxes. The Company recognized a
benefit for income taxes of $325,000 in the year ended December 31, 1995,
reflecting primarily the charge for deferred compensation offset by a deferred
tax liability of $728,000 realized upon the loss of subchapter S status for
income tax purposes. This compared to a provision for income taxes of $43,000
for the prior year.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company had a net working capital deficit of $12.0
million, representing a decrease in working capital of $8.8 million from the net
working capital deficit of $3.2 million at December 31, 1996. Current
liabilities were $19.8 million at June 30, 1997, consisting of $14.0 million in
current maturities of notes payable and subordinated debt, $4.9 million in
accounts payable and accrued liabilities, which include $455,000 in accrued
interest and $789,000 in accrued deferred compensation payments, and $833,000
payable to affiliated dental practices in consideration for accounts receivable
from the affiliated practices. These current liabilities were partially offset
by current assets of $7.8 million, consisting of cash of $1.5 million, billed
and unbilled accounts receivable of $5.8 million and other current assets of
$458,000. A portion of the proceeds of this offering will be used to repay $15.1
million of current indebtedness resulting in pro forma net working capital of
$2.6 million upon completion of the offering and the Austin Acquisition.

For the six months ended June 30, 1997 cash provided by operating
activities was $1.1 million, compared to cash used in operating activities of
$367,000 in the first six months of 1996. In the first six months of 1996, cash
used in investing activities was $7.8 million, of which $7.6 million was
utilized to purchase the assets of dental practices in Florida and Tennessee. In
the six months ended June 30, 1997, $1.4 million in cash was used in investing
activities, of which $1.0 million was used to acquire the option to purchase SW
Dental and $443,000 was used to develop two DE NOVO dental centers in Houston.
Cash provided by financing activities was $3.8 million and $1.8 million in the
six month periods ended June 30, 1996 and 1997, respectively. In the first half
of 1996, cash provided by financing activities consisted of bank borrowings of
$4.0 million, partially offset by debt repayments of $117,000. In the six months
ended June 30, 1997, cash provided by financing activities consisted primarily
of $2.1 million in additional subordinated debt borrowings, partially offset by
debt repayments of $148,000 and offering costs of $146,000.

Cash provided by operations was $498,000 and $406,000 for the years ended
December 31, 1995 and 1996, respectively. Cash used in investing activities was
$441,000 in 1995, consisting of capital expenditures to relocate one dental
center and to establish a new corporate office in Houston. In 1996, cash used in
investing activities was $11.6 million, comprised primarily of net capital
expenditures of $730,000 to develop two DE NOVO dental centers in Houston, and
of $10.3 million to acquire three group dental practices. Cash provided by
financing activities was $6.4 million and $4.8 million for the years ended
December 31, 1995 and 1996, respectively. In 1995, bank borrowings and the sale
of $7.5 million of Senior Subordinated Notes and the Series A Convertible
Preferred Stock were partially offset by a $6.0 million distribution to the sole
shareholder of Jack H. Castle, D.D.S., Inc. as part of the Reorganization. In
1996, cash provided by financing activities consisted primarily of bank
borrowings of $7.3 million, partially offset by debt repayments of $1.5 million.

Prior to December 1995, the Company financed its operations and expansion
primarily through the use of internally generated funds, capital lease
obligations and bank borrowings. In December 1995, as part of the
Reorganization, the Company entered into the Securities Purchase Agreement with
the Pecks Investors and the Bank Credit Facility with a bank. The Securities
Purchase Agreement provided for (i) the issuance of $7.5 million in Senior
Subordinated Notes to the Pecks Investors bearing interest at a rate of 12% per
annum payable quarterly in arrears, with principal payable in two installments
of $3.8 million each on December 18, 2001 and 2002, and (ii) the issuance of
1,244,737 shares of Series A Convertible Preferred Stock to the Pecks Investors.
The $7.5 million proceeds were allocated between the Senior Subordinated

29
<PAGE>
Notes and the Series A Convertible Preferred Stock based on the estimated fair
value of the Series A Convertible Preferred Stock of $2.52 per share, resulting
in a discount on the Senior Subordinated Notes of approximately $2.9 million and
an effective annual interest rate of approximately 24%. The Bank Credit Facility
initially included a $6.0 million term loan and a $3.0 million revolving line of
credit. Of these amounts, $6.0 million was used to acquire the stock of Jack H.
Castle, D.D.S., Inc. as part of the Reorganization. The balance of the proceeds,
net of expenses, was dedicated to fund the Company's development and acquisition
programs.

During 1996, the Company financed its acquisitions, capital expenditures
and working capital requirements through a combination of borrowings under the
Bank Credit Facility, the sale of Senior Subordinated Notes, the issuance of
Common Stock and Seller Notes, and the assumption of certain debt and lease
obligations of the acquired dental practices. In the aggregate, the total
consideration for the Completed Acquisitions consisted of $9.3 million in cash,
$894,000 of assumed debt and capital lease obligations, $4.5 million in Seller
Notes and 331,996 shares of Common Stock.

In May 1996, the Bank Credit Facility was amended to provide a $16.0
million term loan facility and a $3.0 million revolving line of credit. As a
condition to this amendment of the Bank Credit Facility, the Pecks Investors
agreed to accept interest notes in lieu of interest payments if the Company did
not maintain certain financial covenant ratios under the Bank Credit Facility.
At December 31, 1996, the Company had outstanding balances of $8.0 million on
the Senior Subordinated Notes (including $450,000 in interest notes), $10.8
million under the term loan and $1.2 million under the revolving line of credit.

In the third and fourth quarters of 1996 and the first quarter of 1997, the
Company did not make scheduled payments under two Seller Notes in the aggregate
amount of approximately $500,000 because the payment of those amounts would have
breached covenants under the Bank Credit Facility. In May and June 1997, the
Company restructured each of the Seller Notes to provide for payments of
interest only through January 1998 at interest rates of 10% per annum. All of
the defaults under the Seller Notes that were in default have been waived, the
Company is in compliance with the terms of each of the Seller Notes, as
restructured, and the Company intends to pay all of the Seller Notes in full out
of the proceeds of this offering. See "Use of Proceeds."

In connection with the restructuring of the Seller Notes issued in
connection with the acquisition of 1st Dental Care in the aggregate original
principal amount of $2.7 million (the "1st Dental Care Notes"), the Company
granted the holder of the 1st Dental Care Notes, an option to acquire its
operations in Florida for an aggregate consideration of $3.1 million in cash,
the discharge of the 1st Dental Care Notes and the return of the 72,621 shares
of the Company's Common Stock issued in connection with the acquisition of 1st
Dental Care. The option may be exercised only if the Company defaults on
scheduled payments under the restructured 1st Dental Care Notes or if the
Company's lender under the Bank Credit Facility declares a default under the
Bank Credit Facility and accelerates amounts due thereunder. The option
terminates upon payment of $1.8 million owing under the 1st Dental Care Notes.
As a component of the restructuring of the 1st Dental Care Notes, the Company
modified certain other contractual relationships between the Company and Lester
Greenberg, D.D.S. The Company and Dr. Greenberg, and their respective
affiliates, also entered into a limited mutual release with respect to claims
arising out of the Company's default under the 1st Dental Care Notes. An
aggregate of $943,363 of the 1st Dental Notes remains convertible into Common
Stock prior to the time they are paid at a conversion price of $14.34 per share,
subject to antidilution adjustments and automatic annual increases in conversion
price. The Company intends to pay the 1st Dental Care Notes with a portion of
the proceeds of this offering.

In January 1997, the Company advised the bank that it was not in compliance
with certain covenants under the Bank Credit Facility. As a result the Company
and the bank amended the Bank Credit Facility in June 1997, to reduce the term
loan commitment to $10.8 million, the amount outstanding as of the amendment
date, and the bank waived any events of default which had occurred up to the
date of the amendment. As amended, the Bank Credit Facility requires principal
payments of $602,500 to be paid on September 30 and December 31, 1997, with the
remaining balance to be paid on January 31, 1998. The term loan bears interest,
payable quarterly, at the bank's base rate plus 1.5%. The $3.0 million revolving
line of

30
<PAGE>
credit bears interest at the bank's base rate plus 1.0% and also expires on
January 31, 1998. As of July 31, 1997, there was $1.7 million available for
borrowing under the revolving line of credit. A commitment fee is payable
quarterly at rates ranging from 0.25% to 0.5% of the unused amounts under the
Bank Credit Facility for such quarter. The Bank Credit Facility is
collateralized by substantially all of the Company's assets, including a pledge
of the stock of the Company's subsidiaries, and is personally guaranteed by Jack
H. Castle, Jr. The Company intends to repay approximately $9.5 million of the
term loan from the proceeds of this offering. See "Use of Proceeds." The
restructuring of the Bank Credit Facility in June 1997 resulted in the
classification of all amounts owing under the Bank Credit Facility as current
liabilities as of June 30, 1997, contributing $12.1 million to the Company's
working capital deficit.

As a condition to the second amendment to the Bank Credit Facility, the
Pecks Investors agreed to accept interest notes in lieu of interest payments
through the earliest of the consummation of this offering, a private equity
financing, or January 31, 1998. As a result, as of June 30, 1997, the Company
had issued $900,000 in interest notes to the Pecks Investors in lieu of
quarterly interest payments accruing from July 1996. In June 1997, the Company
and the Pecks Investors amended the Securities Purchase Agreement to provide an
additional $2.0 million in Senior Subordinated Notes, with interest payable
monthly at a rate of 12% per annum. The funds provided by the new Senior
Subordinated Notes were used to fund the option to acquire SW Dental and to
provide additional working capital. The Company also issued to the Pecks
Investors 485,382 shares of Series C Convertible Preferred Stock, convertible
into 242,691 shares of Common Stock. The $2.0 million proceeds were allocated
between the Senior Subordinated Notes and the Series C Convertible Preferred
Stock based on their relative fair values of $2.0 million for the Senior
Subordinated Notes and $11 per share for the Series C Convertible Preferred
Stock, resulting in a discount on the $2.0 million Senior Subordinated Notes of
approximately $1.1 million and an effective annual interest rate through
maturity of approximately 200%. The effective yield of the Series C Convertible
Preferred Stock through its redemption date approximated 18.5% based on the fair
value of the underlying Common Stock at June 30, 1997. In June 1997, the Company
recorded a $309,000 dividend to accrete the Series A Convertible Preferred Stock
and the Series C Convertible Preferred Stock to their estimated fair value at
their redemption date. The terms of the Series C Convertible Preferred Stock are
similar to those of the Series A Convertible Preferred Stock. The conversion of
the Series A Convertible Preferred Stock and the Series C Convertible Preferred
Stock into 705,552 and 242,691 shares of Common Stock, respectively, is a
condition to the completion of this offering. The Company anticipates recording
an additional $1.5 million non-cash dividend on the Series C Convertible
Preferred Stock and a $3.8 million extraordinary loss on the Senior Subordinated
Notes upon conversion of the Series A Convertible Preferred Stock and the Series
C Convertible Preferred Stock into the Company's Common Stock and retirement of
the Senior Subordinated Notes in connection with this offering.

The Bank Credit Facility, as amended, and the Securities Purchase
Agreement, as amended, each contain affirmative and negative covenants that
require the Company to maintain certain financial ratios, limit the amount of
additional indebtedness, limit the creation or existence of liens, limit the
ability of the Company to use the proceeds of debt and equity financings, and
set certain restrictions on acquisitions, mergers and sales of assets.

The Company intends to fund the remaining $3.7 million cash portion of the
consideration for the Austin Acquisition with the proceeds of this offering. The
Company intends to use a portion of the remaining proceeds of this offering to
reduce its aggregate indebtedness by approximately $24.8 million. In order to
fund its acquisition strategy following the Austin Acquisition, the Company will
be required to raise additional capital by increasing bank debt or issuing new
securities. The Company in August 1997, received a commitment from a bank to
refinance and expand its existing credit facility to $30.0 million following the
consummation of this offering. The commitment provides for a credit facility of
$15.0 million with an additional $15.0 million credit facility to be syndicated
on a best efforts basis. The credit facility provides for repayment of existing
bank debt over a four year period, with additional advances due five years from
the commencement date. If the Company is successful in completing the full $30.0
million credit facility, the Company will have approximately $23.0 million of
additional borrowing capacity which the Company believes will be sufficient to
fund its acquisition, expansion and working capital needs for the

31
<PAGE>
next 18 months, along with existing cash resources and cash flow from
operations. Completion of the initial $15.0 million bank credit facility is
contingent upon completion of this offering, reduction of the existing Bank
Credit Facility by at least $5.4 million and repayment of the Company's
subordinated debt. There can be no assurance that the Company will be able to
secure the additional $15.0 million syndicated credit facility.

RECENTLY ISSUED PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosures of Information about Capital Structure ("SFAS 129"). These
statements will be adopted by the Company effective January 31, 1998. SFAS 128
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. The Company has not determined the impact of these pronouncements on
its financial statements.

32
<PAGE>
BUSINESS

OVERVIEW

The Company develops, manages and operates integrated dental networks
through contractual affiliations with general, orthodontic and multi-specialty
dental practices in the United States. The Company currently conducts operations
in the states of Texas, Florida and Tennessee and has entered into a management
services agreement with and has agreed to acquire a multi-location dental
practice located in Austin, Texas which the Company believes will complement its
existing Austin operations. The Company does not engage in the practice of
dentistry but rather establishes integrated dental networks by entering into
management services agreements with affiliated dental practices to provide on an
exclusive basis management and administrative services to affiliated dental
practices. The Company's strategy is to provide high-quality care in selected
markets with a view to achieving broad geographic coverage within those markets.
The Company seeks to achieve operating efficiencies by consolidating and
integrating affiliated practices into regional networks, realizing economies of
scale in such areas as marketing, administration and purchasing and enhancing
the revenues of its affiliated dental practices by increasing both patient
visits and the range of specialty services offered. As of August 1, 1997, the
Company provided management services to 40 dental centers with 108 affiliated
dentists, orthodontists and other dental specialists.

The Company's objective is to make each of its dental networks the leading
group dental care provider in each market it serves. Since its formation, the
Company has applied traditional retail principles of business and marketing
techniques to the practice of dentistry, including locating practices in
high-profile locations, offering more affordable fees and payment plans,
expanding the range of services offered, increasing market share through
targeted advertising and offering extended office hours. By using the Castle
Dental Centers' approach to managing affiliated dental practices, the Company
believes it will enable affiliated dentists, orthodontists and other dental
specialists to focus on delivering quality patient care and to realize
significantly greater productivity than traditional individual and small-group
dental practices.

The Company believes that the provision of a full range of dental services
through an integrated network is attractive to managed care payors and intends
to continue to pursue managed care contracts. The Company's affiliated dental
practices currently maintain an aggregate of 11 capitated managed care contracts
covering approximately 30,000 members, and, upon consummation of the Austin
Acquisition, the Company's affiliated dental practices will have an aggregate of
16 managed care contracts covering approximately 50,000 members. The Company
believes that the continued development of its networks will assist it in
negotiating national and regional capitated arrangements with managed care
payors on behalf of the affiliated practices.

The Company intends to utilize the practice management principles employed
in its Houston operations to establish a consistent national identity for its
business. Moreover, the Company believes that its experience and expertise in
managing multi-specialty dental group practices, as well as the development of
name recognition associated with the name "Castle Dental Centers," will
provide its affiliated dental practices with a competitive advantage in
attracting and retaining patients and realizing practice efficiencies.

The Company was formed in 1981 by Jack H. Castle, D.D.S. and Jack H.
Castle, Jr., as a single location, multi-specialty dental practice in Houston,
Texas. From 1982 through 1996, the Company expanded to a total of 10 locations
with 39 dentists in the Houston metropolitan area. During this period the
Company developed, implemented and refined the integrated dental network
approach that it intends to utilize as a basis for its national expansion.

There presently are 11 Castle Dental Centers operating in the Houston,
Texas area and four additional centers in Houston in various stages of
development. In May 1996, the Company acquired the assets of and entered into
long-term management services agreements with 1st Dental Care, a dental practice
with 11 locations in the Tampa/Clearwater, Florida area, and Mid-South Dental
Centers, a dental practice with six dental centers in various locations in
Tennessee. In August 1996, the Company increased its dental practices under
management in Texas by acquiring the assets of Horizon Dental Centers, a dental
practice with four

33
<PAGE>
dental centers in Fort Worth, Texas and four dental centers in Austin, Texas. In
June 1997, the Company entered into a management services agreement with and
agreed to acquire SW Dental, a dental practice with four dental centers in the
Austin, Texas metropolitan area. The closing of the Austin Acquisition is a
condition to, and will occur contemporaneously with, the closing of this
offering.

INDUSTRY BACKGROUND

Dental care services in the United States are generally delivered through a
fragmented system of local providers, primarily sole practitioners, or small
groups of dentists, orthodontists or other dental specialists, practicing at a
single location with a limited number of professional assistants and business
office personnel. According to the American Dental Association 1995 Survey of
Dental Practice ("ADA Survey"), there were approximately 150,800 actively
practicing dental professionals in the U.S., of which approximately 8,900 were
practicing orthodontists. Nearly 81% of the nation's private practitioners work
either as sole practitioners or in a practice with one other dentist. The
balance of these dentists practice in about 4,700 groups of three or more
dentists. However, dental, orthodontic and other specialty practices have
followed the trend of the health care industry generally and are increasingly
forming larger group practices.

The annual aggregate domestic market for dental services was estimated by
the Health Care Financing Administration, Health Care Financing Review (1995) to
be approximately $42.9 billion for 1995, representing approximately 4.3% of
total health care expenditures in the United States, and is projected to reach
$79.1 billion by 2005. Within the total market for dental services in the United
States, there are, in addition to general dentistry, a number of specialties,
including orthodontics (the straightening of teeth and remedy of occlusion),
periodontics (gum care), endodontics (root canal therapy), oral surgery (tooth
extraction) and pedodontics (care of children's teeth). The dental services
market has grown at a compound annual growth rate of approximately 8.1% from
1980 to 1995, and is projected to grow at a compound annual growth rate of
approximately 6.3% through the year 2005. In contrast to other health care
expenditures, dental services are primarily paid for by the patient. According
to the U.S. Department of Health and Human Services, in 1995, consumer
out-of-pocket expenditures accounted for 53% of the payment for dental services,
compared to 19% for other medical services.

The Company believes that the growth in the dental industry has largely
been driven by four factors: (i) an increase in the availability and types of
dental insurance; (ii) an increasing demand for dental services from an aging
population; (iii) the evolution of technology which makes dental care less
traumatic; and (iv) an increased focus on preventive and cosmetic dentistry.

Concerns over the accelerating cost of health care have resulted in the
increasing importance of managed care in the dental industry. Managed care
typically involves a third party (frequently the payor) assuming responsibility
for ensuring that health care is provided in a high-quality, cost-effective
manner. According to industry sources, approximately 18.6% of the estimated
118.5 million people covered by dental benefits in 1995 were enrolled in managed
care programs. It is estimated that managed care's penetration of this group
will increase to 35% of the 131 million people expected to be covered by dental
benefits in the year 2000. Enrollment in managed dental care plans, according to
the National Association of Dental Plans, is estimated to have grown from 7.8
million patients in 1990 to 22.8 million patients in 1995.

The Company believes that the provision of dental, orthodontic and other
specialty care will follow the pattern set by other segments of the health care
industry, moving away from the sole practitioner model to a group practice
environment in which a separate professional management team handles personnel,
management, billing, marketing and other business functions. The trends which
are leading dentists to affiliate with dental practice management companies
include: (i) the increasingly capital intensive nature of acquiring and
maintaining state-of-the-art dental equipment, laboratory and clinical
facilities; (ii) the growing need to develop and maintain specialized management
information and billing systems to meet the increasing demands of payors; and
(iii) the increasingly more complicated, competitive and regulated business
environment for dentists.

34
<PAGE>
BUSINESS STRATEGY

The Company's strategy is to develop integrated networks for the provision
of a broad range of dental services through practice affiliations that provide
high-quality, cost-effective dental care in target markets. Key elements of this
strategy are to:

PROVIDE HIGH-QUALITY, COMPREHENSIVE, ONE-STOP FAMILY DENTAL HEALTH
CARE. The prototypical Castle Dental Center provides general dentistry
as well as a full range of dental specialties (including orthodontics,
pedodontics, periodontics, endodontics, oral surgery and implantology),
thereby allowing the majority of specialty referrals to remain in-house
within the Company's network of facilities. By bringing together
multi-specialty dental services within a single practice, the Company is
able to realize operating efficiencies and economies of scale and to
promote increased productivity, higher utilization of professionals and
facilities, and the sharing of dental specialists among multiple
locations. The Company's practice model also incorporates quality
assurance and quality control programs, including peer review and
continuing education and technique enhancement. The Company believes
that its multi-specialty strategy significantly differentiates it from
both individual and multi-center practices that typically offer only
general dentistry, orthodontics or other single specialty dental
services.

DEVELOP COMPREHENSIVE DENTAL NETWORKS IN TARGET MARKETS. The Company
intends to build its networks through acquisition of existing practices
and DE NOVO development of additional practices within target markets.
The Company seeks to consolidate and integrate its affiliated practices
to establish regional dental care networks. The Company believes this
network system will enable it to reduce the operating costs of its
affiliated practices by centralizing certain functions such as
telemarketing and advertising, billing and collections, payroll and
accounting and by negotiating regional and national contracts for
supplies, equipment, services and insurance. Once practice affiliations
are established in a market, the Company seeks to assist the affiliated
practices in expanding their range of services to make available
specialty dental services not previously offered.

APPLY TRADITIONAL RETAIL PRINCIPLES OF BUSINESS TO DENTAL CARE. The
Company believes it can enhance revenues and profitability by applying
traditional retail principles of business to the provision of dental
services in its target markets. These principles include professionally
produced broadcast and print advertisements targeting specific
audiences, and extended hours of operation which are convenient for
patients, including weekend and evening hours. As part of its retail-
oriented strategy, the Company will seek to establish or, where
appropriate, relocate each Castle Dental Center in a convenient location
in or near a high-profile neighborhood retail area and utilize
innovative sales and marketing programs designed to achieve strong name
recognition and increase patient visits. In addition, the Company
stresses the breadth and affordability of its services and works closely
with patients to establish treatment schedules and affordable payment
plans tailored to the patients' needs.

MARKET ITS NETWORKS TO MANAGED CARE ENTITIES. The Company believes that
managed care will play an increasing role in the provision of dental
services and therefore intends to market the services of its dental
practice networks to the managed care community. The Company believes
that contracting with managed care entities will facilitate entry into
new markets and the expansion of existing networks, as well as improve
the utilization of existing facilities by providing a source of patients
to dentists with whom the Company is affiliated. In addition, such
contracts, including capitated contracts, enable the Company to leverage
its infrastructure and marketing efforts by increasing patient visits.

DENTAL NETWORK DEVELOPMENT

The Company seeks to build its dental networks through the acquisition of
existing dental practices and the DE NOVO development of dental practices in
retail environments.

35
<PAGE>
ACQUISITION CRITERIA

The Company's acquisition strategy is to identify successful group dental
practices in its target markets, acquire certain assets of the identified
practices, enter into long-term management services agreements, and utilize
these core practices as a base from which to expand within the target markets.
Prior to entering any market, the Company considers such factors as population,
demographics, market potential, competitive environment, supply of available
dentists, dental regulatory environment, patient-provider ratios, advertising
costs and the economic condition of the local market. Core acquisition
candidates are successful group dental practices that the Company believes are
leaders in their regional markets. Subsequent acquisitions target practices that
strategically complement the core practices within a market. In considering
acquisitions, the Company evaluates qualitative issues such as the dental
professionals' qualifications, experience and reputation in the local
marketplace and their operating histories, as well as the ability to demonstrate
potential for revenue growth and continued profitability.

COMPLETED ACQUISITIONS

The following table describes acquisitions completed as of July 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
AFFILIATED DENTAL PRACTICE PRINCIPAL LOCATIONS CENTERS AFFILIATED DENTISTS*
- ---------------------------------------- ------------------------------ --------- ---------------------
<S> <C> <C>
1st Dental Care......................... Clearwater/Tampa, Florida 11 16
Mid-South Dental Nashville and 6 21
Centers............................... Chattanooga, Tennessee
Horizon Dental Centers.................. Austin and Fort Worth, Texas 8 23
</TABLE>
- ------------

* Includes full-time and part-time dentists.

The following table describes the consideration paid by the Company for the
Completed Acquisitions.
<TABLE>
<CAPTION>
ASSUMED DEBT AND SHARES OF
AFFILIATED DENTAL PRACTICE CASH CAPITAL LEASES SELLER NOTES COMMON STOCK
- ------------------------------------- --------- ----------------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1st Dental Care...................... $ 3.1 $ 0.2 $2.7 72,621
Mid-South Dental Centers............. 4.0 0.7 0.8 75,000
Horizon Dental Centers............... 2.2 -- 1.0 184,375
--------- ----- ------------ ------------
Total........................... $ 9.3 $ 0.9 $4.5 331,996
========= ===== ============ ============
</TABLE>
The contractual arrangements pursuant to which the Completed Acquisitions
were made include representations and warranties from the sellers regarding the
assets being acquired, and employment agreements with the affiliated practices
containing noncompetition provisions with the former owners of such practices.
Additionally, the Company typically enters into an option agreement with the
owner of the affiliated dental practice which entitles the Company to select
successor owners of the affiliated dental practice. The Common Stock issued in
these transactions has certain contractual registration rights which may be
exercised in future offerings of Common Stock by the Company. See "Description
of Capital Stock -- Registration Rights."

AUSTIN ACQUISITION

In June 1997, the Company entered into a management services agreement with
and agreed to acquire SW Dental. The management services agreement with SW
Dental obligates the Company to act as the sole and exclusive agent for SW
Dental in the management and administration of its business functions and
business affairs. Unlike the Company's typical management services agreement,
however, SW Dental has retained control over the management of its facilities
and supplies, as well as the administration of its accounts receivable and
accounts payable. As compensation for its services under the management services
agreement, the Company receives a monthly management fee comprised of (i) the
costs incurred by it on behalf of SW Dental, and (ii) 15% of the adjusted gross
revenues of SW Dental attributable to the

36
<PAGE>
applicable monthly period, limited over the term of the management services
agreement to the aggregate cash flow of SW Dental for such period. The term of
the management services agreement with SW Dental expires on the earlier of June
1, 1998 or the closing of the transactions referred to in the Option Agreement
described below.

In June 1997, the Company and SW Dental also entered into an Option
Agreement for the Purchase and Sale of Businesses (the "Option Agreement")
which provides for the acquisition by the Company of SW Dental for a
consideration of $5.2 million in cash, $1.5 million of which has already been
paid, and 119,231 shares of Series B Convertible Preferred Stock. The Company
will also assume approximately $412,000 of long-term debt and capital lease
obligations in connection with the Austin Acquisition. The closing of the Austin
Acquisition by the Company is a condition to, and will occur contemporaneously
with, the closing of this offering. In the event the Company does not consummate
the acquisition of SW Dental, the Company will forfeit the $1.5 million
previously paid to SW Dental as partial consideration for the Austin
Acquisition. Moreover, the Company has granted SW Dental an exclusive,
non-transferable option exercisable during the 60-day period beginning May 31,
1998 to acquire the Company's existing operations in the Austin, Texas
metropolitan area at a price of $3.4 million in the event the Austin Acquisition
is not consummated by May 31, 1998.

The contractual arrangements pursuant to which the Austin Acquisition will
be made include representations and warranties from the sellers regarding the
assets being acquired and employment or consulting agreements containing
noncompetition provisions with the former owners of such practices. The Common
Stock to be issued upon conversion of the Series B Convertible Preferred Stock
to be issued in the Austin Acquisition will have certain contractual
registration rights which may be exercised in future offerings of Common Stock
by the Company. See "Description of Capital Stock -- Registration Rights."

AFFILIATION AND INTEGRATION OF DENTAL CENTERS

In affiliating with dental practices, the Company typically: (i) acquires
certain assets of the practice, and, in certain situations, laboratory or other
ancillary facilities that are either owned by or affiliated with such practice
as allowable by federal and state law; (ii) enters into a long-term management
services agreement with such dental practice pursuant to which the Company
provides comprehensive management services to the affiliated practice; (iii)
requires that the affiliated dentists enter into employment agreements with the
affiliated practices containing non-compete and liquidated damages provisions;
and (iv) assumes the principal administrative, financial, marketing and general
management functions of the affiliated practice, including employment of most
administrative personnel. As soon as practicable following the acquisition of an
affiliated dental practice, when market conditions permit, the Company initiates
the process of converting the affiliated practice into a Castle Dental Center.
Management will retain the name of an affiliated practice in situations where
brand recognition has been established. This conversion process, the
implementation and timing of which will vary from market to market, typically
includes the addition of specialty dental services not previously offered by the
center, implementation of retail business concepts applied by the Company in its
Houston operations, and, where appropriate, the relocation of the center to a
more desirable location.

In certain markets, the Company intends to grow through DE NOVO development
to expand in market areas that are either under-served or are otherwise
attractive market opportunities and in which there is no suitable acquisition
candidate. The Company will use its experience in building and staffing DE NOVO
dental centers in Houston, Texas for the implementation of this expansion
strategy.

MANAGEMENT SERVICES AGREEMENT

The Company has entered into a management services agreement with each of
its affiliated dental practices pursuant to which the Company becomes the
exclusive manager and administrator of all non-dental services relating to the
operation of the practice. The Company anticipates that it will enter into a
similar management services agreement with each new affiliated dental practice.
The amount of the management fee charged by the Company to an affiliated dental
practice is intended to reflect and is based on the fair value of the management
services rendered by the Company to the affiliated dental practice.

37
<PAGE>
Subject to applicable law, the Company is paid a monthly management fee
comprised of three components: (i) the costs incurred by it on behalf of the
affiliated practice; (ii) a base management fee in an amount ranging from 12.5%
to 15.0% of adjusted gross revenues; and (iii) a performance fee equal to the
patient revenues of the affiliated dental practice less (a) the expenses of the
affiliated dental practice and (b) the sum of (i) and (ii), as described in each
agreement. The amount of the management fee is reviewed by the Company and the
affiliated dental practice not less frequently than annually in order to
determine whether such fee should be adjusted, up or down, to continue to
reflect the fair value of the management services rendered by the Company.

The obligations of the Company under the typical management services
agreement include assuming financial and other responsibility, either on its own
or with the input and participation of the policy board of the affiliated
practice, for the following (subject to limitations imposed by applicable state
law): facilities, equipment and supplies; advertising, marketing and sales;
training and development; operations management; provision of support services;
risk management and utilization review; application and maintenance of
applicable local licenses and permits; negotiation of contracts between the
affiliated dental practice and third parties, including third-party payors,
alternative delivery systems and purchasers of group health care services;
establishing and maintaining billing and collection policies and procedures;
fiscal matters, such as annual budgeting, maintaining financial and accounting
records, and arranging for the preparation of tax returns; and maintaining
insurance. The Company does not assume any authority, responsibility,
supervision or control over the provision of dental services to patients or for
diagnosis, treatment, procedure or other health care services, or the
administration of any drugs used in connection with any dental practice.

The typical management services agreement is for an initial term of 25 to
40 years, and is automatically renewed for successive five-year terms unless
terminated at least 90 days before the end of the initial term or any renewal
term. Additionally, the typical management services agreement may be terminated
by the Company or the affiliated dental practice in the event of the bankruptcy
or default in the performance of the material duties of the nonterminating
party.

DENTIST EMPLOYMENT AGREEMENTS

As a part of the process of converting an affiliated dental practice into a
Castle Dental Center, each affiliated dental practice has entered into
employment agreements with substantially all of its full-time dentists,
orthodontists and other dental specialists. The Company anticipates that this
practice will continue when market conditions permit. Although the form of
contract varies somewhat among practices and among dentists with different
specialties, the typical contract for a full-time dentist provides for a defined
compensation arrangement, including performance-based compensation and, where
market conditions permit and to the extent deemed enforceable under applicable
law, a covenant not to compete. Each full-time dentist, whether or not a party
to a dentist employment agreement, is required to maintain professional
liability insurance, and mandated coverage limits are generally at least $1.0
million per claim and $1.0 million in the aggregate. In addition, many
affiliated dental practices employ part-time dentists. Not all part-time
dentists have employment agreements, but all part-time dentists are required to
carry professional liability insurance in specified amounts. Certain part-time
dentists retained by the affiliated dental practices are independent contractors
and have entered into independent contractor agreements.

OPERATIONS

CENTER DESIGN AND LOCATION

The affiliated dental practices are generally located in retail
environments. Many of the affiliated practices include semi-private general
dentistry treatment rooms, private treatment rooms and orthodontic bays.
Currently, affiliated dental practices include from four to 22 treatment rooms
and range in size from approximately 2,000 square feet to approximately 6,000
square feet.

Where an acquired practice is not able, due to limitations of floor space,
zoning or other reasons, to accommodate new services or specialists, the Company
may seek to relocate such affiliated practice to a more desirable retail
location as soon as practicable. Since its formation, the Company has adapted
its

38
<PAGE>
locations in Houston, Texas to accommodate the full range of dental specialties.
The Company believes the application of its method of designing and locating
dental centers will facilitate the expansion of services offered by the acquired
practices.

STAFFING AND SCHEDULING

The Company believes that making its facilities available at times which
are convenient to its patients is an important element of its strategy. As a
result, the affiliated dental practices maintain extended hours of operation,
with many affiliated practices opening as early as 7:00 a.m. and closing as late
as 9:00 p.m. on weekdays and 5:00 p.m. on Saturdays. The affiliated practices
are staffed with dentists and dental assistants every day they are open, with
orthodontists and other specialists rotating among several centers in order to
utilize their time optimally. Each patient typically is assigned to and sees the
same dentist or specialist on all visits to the center. Each affiliated dental
practice is also regularly staffed with an office manager, front office staff,
dental assistants and other support staff.

The Company's dental centers are staffed with patient care coordinators who
are responsible for the non-clinical aspects of the patient's experience with
the practice. The patient care coordinator's function is (i) to act as a liaison
between the dentist and patient; (ii) to work with the patient to develop a
treatment schedule with payments tailored to the patient's needs within the
Company's established credit policies; and (iii) to optimize the dentist's time
spent with patients.

FEES AND PAYMENT PLANS

The Company believes that fees charged by its affiliated practices are
typically lower than usual and customary fees within their respective markets.
The affiliated practices generally provide a wide range of payment options,
including cash, checks, credit cards, third party insurance and various forms of
credit. In general, most general dentistry and specialty services, other than
orthodontics, are paid for by the patient, or billed to the patient's insurance
carrier, on the date the service is rendered. In some instances, the Company
will extend credit in accordance with its established credit policies. The
Company believes that its lower fees and ability to assist patients in obtaining
financing provides it with a competitive advantage compared to sole
practitioners and small group practices.

The Company's typical orthodontic payment plan consists of no initial down
payment and equal monthly payments during the term of treatment ranging from $89
to $98 per month. After consultation with the patient care coordinator at the
initial visit, the patient signs a contract outlining the terms of the
treatment, including the anticipated length of treatment and the total fees. The
number of required monthly payments is fixed at the beginning of the case and
corresponds to the anticipated number of monthly treatments. Patients are billed
in advance by the Company on a monthly basis.

SALES AND MARKETING

The Company intends to implement the practice management principles
employed in its Houston operations to establish a consistent national identity
for its business and to utilize the "Castle Dental Centers" name and logo.
When acquired practices already have high existing name recognition within their
local markets, the Company may seek to capitalize on that name recognition and
implement the Castle model while maintaining the existing practice name. The
Company applies traditional retail principles of business to the provision of
dental care. These principles include network development, extended hours of
operation, location optimization, signage, customized treatment schedules,
affordable fees and payment plans. The Company has used both print advertising
and professionally produced broadcast advertising to market its dental services
to potential patients in Houston, Texas and the Company intends to use the same
marketing techniques in its regional markets.

The Company has also established a regional telemarketing system in Houston
and Austin, Texas to field calls generated by advertising, to confirm upcoming
scheduled patient visits and to encourage patients to return for follow-up
visits and regularly scheduled six-month periodic exams. Where feasible, the
Company intends to establish additional telemarketing systems in other regional
markets. The telemarketers

39
<PAGE>
can enter all relevant information into the Company's management information
system for patients making appointments for an initial visit, including
pre-screening patients for insurance and other credit information.

QUALITY ASSURANCE

Affiliated dental practices are solely responsible for all aspects of the
practice of dentistry. The Company has responsibility for the business and
administrative aspects of the practices and exercises no control over the
provision of dental services. The Company's management structure is designed to
bring to its affiliated dental practices improvements in their recruiting and
professional training. The Company expects that the increased visibility of the
Company, the ability to offer career paths previously unavailable to dentists
and the ability to recruit for multiple markets will give it an advantage in
recruiting and retaining dentists. In addition, the Company believes that the
ability to offer dentists in private practice the chance to practice in an
environment where they do not assume capital risks and administrative burdens
normally associated with private practice will make joining the Company an
attractive choice for private practitioners.

Most affiliated dental practices have policy boards comprised of
representatives of both the Company and the affiliated dental practice. The
policy boards are responsible for developing and implementing management and
administrative policies for the overall operation of the affiliated dental
practice. Specifically, the policy board has the authority to review and approve
capital improvements and expansion, marketing and advertising, collection
policies, provider and payor relationships, strategic planning and capital
expenditures. However, in recognition of the laws and regulations applicable to
the licensure and practice of dentistry, the policy board does not make clinical
decisions, recommendations or other decisions that are required to be made by a
licensed dentist.

MANAGED CARE

Concerns over the accelerating cost of dental care have resulted in the
increasing role of managed care in the Company's strategy. As markets evolve
from traditional fee-for-service dental care to managed care, dental care
providers confront competitive pressure to provide high-quality dental care in a
cost-effective manner. Employer groups have begun to bargain collectively in an
effort to reduce the cost of dental care and to bring about greater
accountability of providers with respect to accessibility, choice of provider,
quality of care and other indicators of consumer satisfaction.

The Company believes that managed care will play an increasing role in the
provision of dental services and therefore intends to market the services of its
networks to the managed care community. A component of the Company's strategy is
to seek long-term relationships with insurance companies with a view to reducing
the Company's risk of expanding into new markets served by the insurance
companies. Moreover, the Company believes that its managed care relationships
will enhance the Company's utilization rates at existing locations. While the
laws of some states permit the Company to participate in the negotiation by
affiliated dental practices of managed care contracts, preferred provider
arrangements and other negotiated price agreements, the affiliated dental
practices are the contracting parties for all such relationships, and the
Company is dependent on its affiliated dental practices for the success of such
relationships. See "Risk Factors -- Risks Associated with Managed Care
Contracts; Capitated Fee Revenue" and "-- Reliance on Affiliated Dental
Practices."

SERVICES

The Company provides management expertise, marketing, information systems,
capital resources and acquisition services to its affiliated dental practices.
As a result, the Company is involved in the financial and administrative
management of the affiliated dental practices, including legal, financial
reporting, cash management, human resources and insurance assistance. The
Company's goals in providing such services are (i) to allow the dentists
associated with affiliated dental practices to dedicate their time and efforts
more fully to patient care and professional practice activities; (ii) to improve
the performance of affiliated dental practices in these administrative and sales
activities; and (iii) to enhance the financial return to the Company.

40
<PAGE>
Aside from the centralization of functions mentioned above, the affiliated
dental practices are encouraged to administer their practices in accordance with
the needs of their specific patient populations. The practice of dentistry at
each affiliated dental practice is under the exclusive control of the dentists
who practice at such location.

The majority of the practices whose non-dental assets are available to the
Company for acquisition are general dentistry practices. General dentistry
includes diagnostics, treatment planning, preventive care, removal of infection,
fillings, crowns, bridges, partials, dentures, and extractions, all of which are
currently being provided by the affiliated dental practices. Within its network,
the Company provides a wide range of specialty services. The Company seeks to
expand the services offered by affiliated practices beyond general dentistry to
include other dental specialty services and to improve efficiency by improving
appointment availability, increasing practice visibility and assisting the
practices in adding complementary services. These complementary services include
orthodontics, periodontics (the diagnosis, treatment and prevention of infection
of the gums and supporting bone around the teeth), endodontics (the diagnosis,
treatment and prevention of infection of the oral tissues), oral surgery and
implantology (the placement of abutments (implants) in the jaw bones to support
tooth replacement). By adding these complementary services to the practice, the
affiliated dental practices will retain the majority of specialty service
referrals in-house, thereby increasing patient revenues.

MANAGEMENT INFORMATION SYSTEMS

The Company and its affiliated dental practices presently utilize various
dental practice management software systems to monitor and control patient
treatment, scheduling, invoicing of patients and insurance companies,
productivity of clinical staffs and other practice related activities. The
Company has identified the practice management software system that it currently
employs in its Houston operations as its preferred system and intends, where
appropriate, to use the Houston system as a common practice management system
for use by its affiliated practices. The Company is presently implementing a
client-server based management information system designed to enable the Company
to compare financial performance of affiliated dental practices, to track and
control costs, and to facilitate the accounting and financial reporting process
between the affiliated dental practices and corporate headquarters. The Company
intends to use its financial information system in conjunction with existing
practice management systems at the affiliated dental practices.

GOVERNMENT REGULATION

GENERAL

The practice of dentistry is highly regulated, and there can be no
assurance that the regulatory environment in which the affiliated dental
practices and the Company operate will not change significantly in the future.
In general, regulation of health care related companies also is increasing.

Every state imposes licensing and other requirements on individual dentists
and dental facilities and services. In addition, federal and state laws regulate
health maintenance organizations and other managed care organizations for which
dentists may be providers. In connection with its operations in existing markets
and expansion into new markets, the Company may become subject to compliance
with additional laws, regulations and interpretations or enforcements thereof.
The ability of the Company to operate profitably will depend in part upon the
Company and its affiliated dental practices obtaining and maintaining all
necessary licenses, certifications and other approvals and operating in
compliance with applicable health care regulations.

Dental practices must meet federal, state and local regulatory standards in
the areas of safety and health. Historically, those standards have not had any
material adverse effect on the operations of the dental practices managed by the
Company. Based on its familiarity with the operations of the dental practices
managed by the Company, management believes that it, and the practices it
manages, are in compliance in all material respects with all applicable federal,
state and local laws and regulations relating to safety and health.

41
<PAGE>
MEDICARE AND MEDICAID FRAUD AND ABUSE

Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration in return for, or in order to induce, (i) the referral of a
person for services, (ii) the furnishing or arranging for the furnishing of
items or services or (iii) the purchase, lease or order or arranging or
recommending purchasing, leasing or ordering of any item or service, in each
case, reimbursable under Medicare or Medicaid. Because dental services are
covered under various government programs, including Medicare, Medicaid or other
federal and state programs, the law applies to dentists and the provision of
dental services. Pursuant to this anti-kickback law, the federal government
announced a policy of increased scrutiny of joint ventures and other
transactions among health care providers in an effort to reduce potential fraud
and abuse related to Medicare and Medicaid costs. Many states have similar
anti-kickback laws, and in many cases these laws apply to all types of patients,
not just Medicare and Medicaid beneficiaries. The applicability of these federal
and state laws to many business transactions in the health care industry,
including the Company's operations, has not yet been subject to judicial
interpretation.

Significant prohibitions against physician self-referrals, including those
by dentists, for services covered by Medicare and Medicaid programs were
enacted, subject to certain exceptions, by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II,"
amended prior physician and dentist self-referral legislation known as "Stark
I" (which applied only to clinical laboratory referrals) by dramatically
enlarging the list of services and investment interests to which the referral
prohibitions apply. Effective January 1, 1995 and subject to certain exceptions,
Stark II prohibits a physician or dentist or a member of his immediate family
from referring Medicare or Medicaid patients to any entity providing
"designated health services" in which the physician or dentist has an
ownership or investment interest, or with which the physician or dentist has
entered into a compensation arrangement, including the physician's or dentist's
own group practice unless such practice satisfies the "group practice"
exception. The designated health services include the provision of clinical
laboratory services, radiology and other diagnostic services (including
ultrasound services), radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
certain equipment and supplies, prosthetics, orthotics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services. A
number of states also have laws that prohibit referrals for certain services
such as x-rays by dentists if the dentist has certain enumerated financial
relationships with the entity receiving the referral, unless an exception
applies.

Noncompliance with, or violation of, the federal anti-kickback legislation
or Stark II can result in exclusion from Medicare and Medicaid as well as civil
and criminal penalties. Similar penalties are provided for violation of state
anti-kickback and self-referral laws. To the extent that the Company or any
affiliated dental practice is deemed to be subject to these federal or similar
state laws, the Company believes its intended activities will comply in all
material respects with such statutes and regulations.

STATE LEGISLATION

In addition to the anti-kickback laws and anti-referral laws noted above,
the laws of many states prohibit dentists from splitting fees with non-dentists
and prohibit non-dental entities such as the Company from engaging in the
practice of dentistry and from employing dentists to practice dentistry. The
specific restrictions against the corporate practice of dentistry, as well as
the interpretation of those restrictions by state regulatory authorities, vary
from state to state. However, the restrictions are generally designed to
prohibit a non-dental entity from controlling the professional assets of a
dental practice (such as patient records and payor contracts), employing
dentists to practice dentistry (or, in certain states, employing dental
hygienists or dental assistants), controlling the content of a dentist's
advertising or professional practice or sharing professional fees. The laws of
many states also prohibit dental practitioners from paying any portion of fees
received for dental services in consideration for the referral of a patient. In
addition, many states impose limits on the tasks that may be delegated by
dentists to dental assistants.

42
<PAGE>
dental hygienists or dental assistants); all dental services are provided by a
licensed dentist; licensed dentists have control over the manner in which dental
care is provided and all decisions affecting the provision of dental care. State
laws generally require that the amount of a management fee be reflective of the
fair market value of the services provided by the management company and certain
states require that any management fee be a flat fee or cost-plus fee based on
the cost of services performed by the Company. In general, the state dental
practice acts do not address or provide any restrictions concerning the manner
in which companies account for revenues from a dental practice subject to the
above-noted restrictions relating to control over the professional activities of
the dental practice, ownership of the professional assets of a dental practice
and payments for management services.

The Company does not control the practice of dentistry or employ dentists
to practice dentistry. Moreover, in states in which it is prohibited the Company
does not employ dental hygienists or dental assistants. The Company provides
management services to its affiliated practices, and the management fees the
Company charges for those services are consistent with the laws and regulations
of the jurisdictions in which it operates.

In addition, there are certain regulatory risks associated with the
Company's role in negotiating and administering managed care and capitation
contracts. The application of state insurance laws to reimbursement arrangements
other than various types of fee-for-service arrangements is an unsettled area of
law and is subject to interpretation by regulators with broad discretion. As the
Company or its affiliated practices contract with third-party payors, including
self-insured plans, for certain non-fee-for-service basis arrangements, the
Company or the affiliated dental practices may become subject to state insurance
laws. In the event that the Company or the affiliated practices are determined
to be engaged in the business of insurance, these parties could be required
either to seek licensure as an insurance company or to change the form of their
relationships with third-party payors, and may become subject to regulatory
enforcement actions. In such events, the Company's revenues may be adversely
affected.

REGULATORY COMPLIANCE

The Company regularly monitors developments in laws and regulations
relating to dentistry. The Company may be required to modify its agreements,
operations or marketing from time to time in response to changes in the
business, statutory and regulatory environments. The Company plans to structure
all of its agreements, operations and marketing in compliance with applicable
law, although there can be no assurance that its arrangements will not be
successfully challenged or that required changes may not have a material adverse
effect on operations or profitability.

COMPETITION

The dental care industry is highly fragmented, comprised principally of
sole practitioners and group practices of dental and orthodontic services. The
dental practice management industry is subject to continuing changes in the
provision of services and the selection and compensation of providers. The
Company is aware of several groups attempting to acquire or manage dental
practices. Certain of the Company's competitors are larger and better
capitalized, may provide a wider variety of services, may have greater
experience in providing dental care management services and may have longer
established relationships with buyers of such services.

In certain markets, the demand for dental care professional personnel
presently exceeds the supply of qualified personnel. As a result, the Company
experiences competitive pressures for the recruitment and retention of qualified
dentists to deliver their services. The Company's future success depends in part
on its ability to continue to recruit and retain qualified dentists to serve as
employees or independent contractors of the affiliated dental practices. There
can be no assurance that the Company will be able to recruit or retain a
sufficient number of competent dentists to continue to expand its operations.

EMPLOYEES

As of July 31, 1997, the Company and its affiliated dental practices
employed approximately 620 administrative and dental office personnel on a
full-time or part-time basis, and the affiliated dental practices employed
approximately 77 general dentists and 17 specialists on a full-time or part-time
basis. Following consummation of the Austin Acquisition, the Company expects
that approximately 700 people will be employed on a full-time or part-time basis
by the Company and 108 dentists will be employed on a full-time or part-time
basis by the affiliated dental practices. In addition, as a component of its
acquisition

43
<PAGE>
strategy, the Company frequently enters into employment or consulting agreements
for ongoing management and administrative services with the dentists from whom
it acquires affiliated practices. The Company believes that its relations with
its employees are good. The Company believes that it may need to hire additional
personnel to accommodate the demands prompted by the provision of services to
each of the affiliated practices under the management services agreements, as
well as to pursue its growth strategies.

FACILITIES

The Company leases approximately 12,000 square feet of space for executive,
administrative, sales and marketing and operations offices in Houston, Texas.
The Company's initial lease term expires May 2000, which may be extended at the
Company's option for an additional 60 months.

All of the Company's existing centers are leased. Two of the centers are
owned by affiliates of the companies from whom the Company acquired affiliated
dental practices. All such facilities leased by the Company are leased on a
basis not less favorable to the Company than fair market value basis.

The Company intends to lease centers or enter into build-to-suit
arrangements with third parties for dental centers to be leased by the Company.
Certain leases provide for fixed minimum rentals and provide for additional
rental payments for common area maintenance, insurance and taxes. The leases
carry varying terms expiring between 1997 and 2006 excluding options to renew.

The majority of the centers are located in retail locations. The Company
believes that its leased facilities are well maintained, in good condition and
adequate for its current needs. Furthermore, the Company believes that suitable
additional or replacement space will be available when required.

CORPORATE LIABILITY AND INSURANCE

The provision of dental services entails an inherent risk of professional
malpractice and other similar claims. Although the Company does not influence or
control the practice of dentistry by dentists or have responsibility for
compliance with certain regulatory and other requirements directly applicable to
dentists and dental groups, the contractual relationship between the Company and
the affiliated dental practices may subject the Company to some medical
malpractice actions under various theories, including successor liability. There
can be no assurance that claims, suits or complaints relating to services and
products provided by managed practices will not be asserted against the Company
in the future. The availability and cost of professional liability insurance has
been affected by various factors, many of which are beyond the control of the
Company. The cost of such insurance to the Company and its affiliated dental
practices may have an adverse effect on the Company's operations.

The Company requires each affiliated dental practice to maintain
comprehensive general liability and professional liability coverage covering the
practice and each dentist retained or employed by the affiliated dental
practice, which normally provide for comprehensive general liability coverage of
$1.0 million for each occurrence and $2.0 million annual aggregate, and
professional liability coverage of not less than $1.0 million for each
occurrence and $1.0 million annual aggregate.

The Company maintains other insurance coverages including general
liability, property, business interruption and workers' compensation, which
management considers to be adequate for the size of the Company and the nature
of its business.

LITIGATION

The Company and the affiliated dental practices are parties to various
lawsuits from time to time in the ordinary course of their respective
businesses. Management does not believe that any of the claims currently
outstanding would have a material adverse effect on the Company's business if
determined adversely to the Company or an affiliated dental practice, as the
case may be.

In July and August 1997, a dentist from whom the Company acquired Horizon
Dental Centers in August 1996 contacted the Company asserting that the Company
misrepresented the value of the Common Stock issued to him as a part of the
consideration for the acquisition, and demanded the issuance of approximately
200,000 shares of Common Stock as additional consideration for the transaction.
The Company believes that asserted claims are without merit and has denied the
demand for the issuance of additional shares of Common Stock. The Company has
been advised that the dentist does not presently intend to commence litigation
against the Company. In the event, however, that litigation is initiated against
the Company, the Company intends to defend itself vigorously. See "Risk
Factors -- Risks Associated With Potential Litigation."

<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the
directors, executive officers and certain significant employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- ---- ---------------------------------------------------------------
<S> <C>
Jack H. Castle, Jr...................... 42 Chairman, Chief Executive Officer and Director
G. Daniel Siewert III................... 53 President and Chief Operating Officer
John M. Slack........................... 49 Vice President, Chief Financial Officer and Secretary
Eric H. Shamban......................... 44 Vice President -- Operations
Judith A. Dolifka....................... 37 Controller
Stephen L. Clayton, D.D.S............... 43 Regional Director of Patient Care
G. Powell Bilyeu, D.D.S................. 65 Regional Director of Patient Care
Lester B. Greenberg, D.D.S.............. 62 Regional Director of Patient Care
John G. Goodman, D.D.S.................. 44 Regional Director of Patient Care
Jack H. Castle, D.D.S................... 75 Director
Robert J. Cresci........................ 53 Director
G. Kent Kahle........................... 46 Director
Emmett E. Moore*........................ 55 Director
Elizabeth A. Tilney..................... 40 Director
Louis A. Waters*........................ 58 Director
</TABLE>
- ------------

* Mr. Moore and Mr. Waters have agreed to become directors of the Company upon
the closing of the offering.

The following is a biographical summary of the experience of the directors,
executive officers and certain significant employees of the Company:

JACK H. CASTLE, JR. was a co-founder of the Company in 1981 and has served
as Chief Executive Officer since 1990. He became the Company's Chairman in
August 1996. Mr. Castle received a B.A. from Rollins College and a Masters of
Business Administration from Wake Forest University. Mr. Castle is the son of
Jack H. Castle, D.D.S.

G. DANIEL SIEWERT III joined the Company in August 1997 as President and
Chief Operating Officer. From January 1995 through June 1997, he served as Chief
Operating Officer for Family Dental Center, Inc., a large group dental practice
with locations in Sears Roebuck & Company stores. From November 1993 to December
1994, Mr. Siewert provided business management consulting for a major retail
eyecare company. Prior to that, from September 1990 until August 1993, he was
CEO of National Vision Associates, Inc.

JOHN M. SLACK joined the Company in December 1995 as Vice President and
Chief Financial Officer. From November 1994 through November 1995, he served as
Vice President and Chief Financial Officer of Team, Inc., a publicly-held
environmental services company. From 1985 through August 1994, Mr. Slack was
Vice President and Chief Financial Officer of Serv-Tech, Inc., a publicly-held
industrial services company. Mr. Slack received a B.S. in international
economics from Georgetown University in 1969.

ERIC H. SHAMBAN joined the Company in October 1996 as Vice
President -- Operations. From March 1995 through October 1996, he served as
Senior Sales Consultant for Quality Systems, Inc., a leading provider of
management information systems to group dental practices. From November 1994
until February 1995, Mr. Shamban was director of managed care programs for
United HealthCare. Prior to that Mr. Shamban was senior applications consultant
for Quality Systems, Inc. Mr. Shamban received a B.A. from Boston University.

JUDITH A. DOLIFKA joined the Company in May 1996 as Controller. From April
1990 to April 1996 she was the Assistant Controller and Manager of Financial
Reporting of Serv-Tech, Inc. From 1982 until 1990 Ms. Dolifka worked in public
accounting most recently as an audit manager with Coopers & Lybrand,

45
<PAGE>
L.L.P. Ms. Dolifka received a B.B.A. in accounting from Ball State University
and is a Certified Public Accountant in the State of Texas.

STEPHEN L. CLAYTON, D.D.S. has been the clinical director of the Company
since February 1988 and has served as Regional Director of Patient Care of the
Company since July 1996. From 1980 to 1988, Dr. Clayton engaged in private
practice in Texas and Oklahoma. Dr. Clayton received his Doctor of Dental
Surgery from the University of Texas Dental Branch at San Antonio in 1980. Dr.
Clayton is a member of the Greater Houston Dental Society, Texas Dental
Association, American Dental Association and the Academy of General Dentistry.

G. POWELL BILYEU, D.D.S. has been a Regional Director of Patient Care of
the Company since May 1996, following the Company's acquisition of Mid-South
Dental Centers. Dr. Bilyeu founded Mid-South Dental Centers in 1978 and served
as president and owner until 1996. Dr. Bilyeu received a Doctor of Dental
Surgery from the University of Tennessee College of Dentistry in 1962.

LESTER B. GREENBERG, D.D.S. has been a Regional Director of Patient Care of
the Company since May 1996, following the Company's acquisition of 1st Dental
Care. From 1980 to 1996, Dr. Greenberg was the founder, Chief Executive Officer
and owner of 1st Dental Care. Dr. Greenberg received a Doctor of Dental Surgery
from the University of Tennessee College of Dentistry in 1957.

JOHN G. GOODMAN, D.D.S. has been a Regional Director of Patient Care of the
Company since June 1997, when the Company entered into a management services
agreement with SW Dental. Dr. Goodman founded SW Dental in 1992 and serves as
President. Dr. Goodman also founded, owned and operated a multi-practitioner
practice in Oregon for 12 years. Dr. Goodman received a Doctor of Dental Surgery
from the University of Texas Health Science Center of San Antonio in 1978.

JACK H. CASTLE, D.D.S. has served as a director of the Company since 1981
and as Chairman of the Company from 1981 until August 1996. He is also the sole
owner of Jack H. Castle, D.D.S., P.C., a dental practice managed by the Company.
Prior to co-founding the Company, Dr. Castle operated a single location dental
practice. Dr. Castle graduated from the University of Houston in 1943 and
received a Doctorate of Dental Surgery from the University of Texas Health
Science Center in Houston in 1945. He served in the United States Navy from 1947
to 1949. Dr. Castle is the father of Jack H. Castle, Jr.

ROBERT J. CRESCI has been a director of the Company since December 1995.
Mr. Cresci has been a Managing Director of Pecks Management Partners Ltd., an
investment management firm, since September 1990. Mr. Cresci graduated from The
United States Military Academy at West Point and received a Masters of Business
Administration from Columbia University Graduate School of Business. Mr. Cresci
currently serves on the boards of Bridgeport Machines, Inc., EIS International,
Inc., Sepracor, Inc., Westbrae Natural, Inc., Arcadia Financial, Ltd., Hitox,
Inc., Garnet Resources Corporation, HarCor Energy, Inc., Meris Laboratories,
Inc., Film Roman, Inc., Educational Medical, Inc., Source Media, Inc. and
several private companies.

G. KENT KAHLE has been a director of the Company since December 1995. He
has been a Managing Director of The GulfStar Group, Inc., an investment banking
firm, since 1990. From 1982 to 1990 Mr. Kahle held various positions with Rotan
Mosle, Inc., most recently as Senior Vice President and Director. Mr. Kahle has
a Masters of Business Administration from The Wharton School of the University
of Pennsylvania and an A.B. from Brown University. He currently serves on the
boards of Total Safety, Inc., Litigation Resources of America, Inc. and Chase
Telecommunications, Inc.

EMMETT E. MOORE has agreed to serve as a director of the Company upon the
closing of this offering. Mr. Moore has been the Chairman of the Board and Chief
Executive Officer of Physicians Resource Group, Inc., a publicly-traded
ophthalmology practice management company ("PRG"), since September 1995, and
served as the President and a director of PRG since April 1995. From August 1983
to December 1994, Mr. Moore served in various capacities with Medical Care
America, Inc., a publicly-traded company that owned and operated outpatient
surgery centers and was acquired in September 1994 by Columbia/HCA Healthcare
Corporation. Mr. Moore received B.B.S., J.D. and M.P.A. degrees from the
University of Texas, and is a certified public accountant.

46
<PAGE>
ELIZABETH A. TILNEY has been a director of the Company since August 1996.
Ms. Tilney has been Senior Vice President, Marketing and Communications, of
Enron Corp. since March 1996, where she is responsible for corporate affairs,
marketing, advertising and public relations. From 1987 to 1996, Ms. Tilney held
various positions with Russell Reynolds Associates, an executive search firm,
and was most recently an Executive Director. Ms. Tilney was an account manager
associated with Ogilvy & Mather Advertising in New York and Houston from 1983 to
1987. Ms. Tilney has a Masters of Business Administration from The Amos Tuck
School of Business Administration of Dartmouth College and a B.A. from the
University of Virginia.

LOUIS A. WATERS has agreed to serve as a director of the Company upon the
closing of this offering. Mr. Waters co-founded Browning-Ferris Industries, Inc.
in 1969, serving as Chairman of the Board and Chief Executive Officer until
1980. He served as Chairman of the Executive Committee and subsequently Chairman
of the Finance Committee until March 1997. He also served as Chairman and Chief
Executive Officer of BFI International, Inc. from December 1991 to March 1997.
Mr. Waters received a B.A. and B.S. in mechanical engineering from Rice
University and an M.B.A. from Harvard Business School.

All directors of the Company currently hold office for one-year terms until
the next annual meeting of stockholders of the Company and until their
successors are elected and qualified. Mr. Cresci was elected to the Board of
Directors pursuant to the terms of the Securityholders Agreement (as hereinafter
defined) pursuant to which the Pecks Investors have the right to have one
designee nominated to the Board of Directors for so long as 20% of the Series A
Convertible Preferred Stock or 20% of the Common Stock issuable on conversion of
the Series A Convertible Preferred Stock and Series C Convertible Preferred
Stock is held by the Pecks Investors. See " -- Securityholders Agreement."

Officers are appointed by and serve at the discretion of the Board of
Directors. The officers will devote substantially all of their business time to
the business and affairs of the Company.

AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

The Board of Directors currently has an Audit Committee. The members of the
Audit Committee are Messrs. Cresci and Kahle, both of whom are independent
directors. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans for and results of the audit, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees, reviews the non-audit services performed by the independent
accountants and reviews the adequacy of the Company's internal accounting
controls.

COMPENSATION OF DIRECTORS

Following the closing of the offering, each member of the Board of
Directors who is not an employee of the Company will receive annual compensation
of $6,000 for serving on the Board of Directors, plus a fee of $1,000 for each
Board of Directors meeting attended in person and $500 for each telephonic Board
of Directors meeting in which the director participates. All directors receive
reimbursement of reasonable expenses incurred in attending Board and committee
meetings and otherwise carrying out their duties. Additionally, each
non-employee director will be granted options pursuant to the Directors' Plan.
See " -- Stock Option Plans -- Directors' Stock Option Plan."

In connection with the Reorganization, the Company entered into a Deferred
Compensation Agreement with Jack H. Castle, D.D.S. pursuant to which the Company
agreed to pay Dr. Castle an aggregate of $2.6 million payable in 20 quarterly
installments beginning March 1996. In June 1997, Dr. Castle and the Company
amended the Deferred Compensation Agreement (i) postponing the payment of any
scheduled payments under the Deferred Compensation Agreement until the earlier
of (a) the issuance of any debt consented to by the bank the proceeds of which
are applied to pay amounts owed under the Bank Credit Facility and the Interim
Financing, or the closing of any equity offering the proceeds of which are
applied to pay amounts owed under the Bank Credit Facility and the Interim
Financing, and (b) January 31, 1998, at which time the scheduled deferred
compensation payments shall become payable beginning on the next

47
<PAGE>
scheduled payment date, and (ii) deferring payment of the scheduled payments
under the Deferred Compensation Agreement which were not made on and after
September 30, 1996 until the earlier of (a) the closing of an initial public
offering of the Company's Common Stock in which the gross proceeds are not less
than $25.0 million; provided, however, that such payments shall only be made in
the event the Company first pays any amounts owing under the Bank Credit
Facility and the Interim Financing; or (b) December 31, 2000. Amounts not paid
when scheduled under the original Deferred Compensation Agreement bear interest
at the rate of 10% per annum. A portion of the proceeds of this offering will be
used to pay amounts so deferred under the Deferred Compensation Agreement. In
the event the Underwriters exercise their over-allotment option in full, the
Company intends to prepay the remaining $1.9 million balance due under the
Deferred Compensation Agreement. The Company has obtained the required consents
under the Bank Credit Facility to make the above-described payments of the
Deferred Compensation Agreement. See "Use of Proceeds." In connection with the
purchase of the stock of Jack H. Castle, D.D.S., Inc., the Company also entered
into a Management Services Agreement with Jack H. Castle, D.D.S., P.C., a
professional corporation of which Dr. Castle is the sole owner. Pursuant to the
Management Services Agreement, Dr. Castle receives an annual payment of $100,000
for services performed in connection therewith. See "Certain Transactions."

EXECUTIVE COMPENSATION AND EMPLOYMENT ARRANGEMENTS

None of the Company's senior executive officers currently has an employment
agreement or is subject to a covenant not to compete or other agreement which
would restrict his ability to compete against the Company should his employment
by the Company be terminated for any reason.

SUMMARY COMPENSATION. The following table sets forth the total
compensation paid by the Company for services rendered during the years ended
December 31, 1994, 1995 and 1996, to the Company's Chief Executive Officer and
other executive officers whose total 1996 salary and bonus exceeded $100,000
during such year.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
--------------------
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2)
- ------------------------------------- ------- ---------- -------- ---------------
<S> <C> <C> <C>
Jack H. Castle, Jr................... 1996 $ 300,018 $200,000 --
President and Chief 1995 401,639 -- $ 219,132
Executive Officer 1994 428,956 -- 174,074
Jack H. Castle, D.D.S................ 1996 100,000 -- 263,000
President of Jack H. Castle, 1995 327,693 -- 1,795,681
D.D.S., P.C.(3) 1994 300,033 -- 1,245,532
Seth L. Miller....................... 1996 117,340 -- 33,014
President(4)
John M. Slack........................ 1996 120,003 -- --
Vice President, Chief Financial
Officer and Secretary
</TABLE>
- ------------

(1) The columns for "Long-Term Compensation" and "Other Annual Compensation"
have been omitted because there is no compensation required to be reported
in such columns. The aggregate amount of perquisites and other personal
benefits provided to each officer listed above is less than 10% of the total
annual salary and bonus of such officer.

(2) In 1994 and 1995, significant operations of the Company were conducted
through a subchapter S Corporation. Other compensation in 1994 and 1995
primarily represents distributions of profits from such corporation, as well
as amounts paid by it and the Company's predecessor for expenses of Jack H.
Castle, Jr. and Jack H. Castle, D.D.S.

(3) Compensation paid to Dr. Castle includes amounts paid by Jack H. Castle,
D.D.S., Inc., a professional corporation to which the Company provided
management services prior to its acquisition by the Company as part of the
Reorganization effected in December 1995. All other compensation paid in

48
<PAGE>
1996 to Dr. Castle represents payments made under the Deferred Compensation
Agreement. See "Unaudited Pro Forma Consolidated Financial Information"
and "Certain Transactions."

(4) Mr. Miller joined the Company in April 1996 as Executive Vice President and
Chief Operating Officer. He became President and Chief Operating Officer in
August 1996. Mr. Miller resigned from the Company in February 1997.

OPTION GRANTS. During 1996, the following executive officers of the
Company were granted incentive stock options under the Plan:

NAME NUMBER OF OPTIONS EXERCISE PRICE
- ------------------------------------- ----------------- --------------
Seth L. Miller....................... 25,000 $11.00
John M. Slack........................ 20,000 10.00

None of Mr. Miller's options were vested at the time of his resignation.
Twenty percent of Mr. Slack's options vested in February 1997, and an additional
20% of Mr. Slack's options will vest in February of each of the next four years.

For 1997, the Company has agreed to pay its senior executive officers the
base salaries set forth below. Each of the senior executive officers is eligible
to receive a performance based discretionary bonus for 1997. Additionally, the
following executive officers will receive grants under the Plan, effective at
the consummation of this offering. All of these options will be granted at the
initial public offering price and will be exercisable one year from the date of
grant as to 20% of the underlying shares, and as to an additional 20% on each of
the next four anniversaries of the date of the option grant, except for 10,000
of the options granted to Mr. Siewert, which are currently exercisable.

SALARY OPTIONS
-------- --------
Jack H. Castle, Jr................... $254,166 100,000
G. Daniel Siewert III................ 175,000 110,000
John M. Slack........................ 120,000 30,000

PRIOR EMPLOYMENT RELATIONSHIP OF MR. SIEWERT

Until June 1998, Mr. Siewert is subject to a covenant not to compete with a
former employer that prohibits his employment by or affiliation with any entity
that offers or performs dental services or management services in certain
counties of Illinois, Indiana, Michigan, Ohio, Pennsylvania and Wisconsin. The
Company has no present plans to expand into these markets before June 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors did not have a Compensation Committee during 1995.
As a result, the Board of Directors, then consisting of Jack H. Castle, Jr.,
Jack H. Castle, D.D.S. and Loretta Castle, made all decisions concerning
executive officer compensation. Loretta Castle is the mother of Jack H. Castle,
Jr. and the wife of Jack H. Castle, D.D.S.

In December 1995, the Company acquired all of the stock of Jack H. Castle,
D.D.S., Inc., a professional corporation of which Dr. Castle, a director of the
Company, was the sole owner. In connection with that transaction, the Company
paid Dr. Castle $6.0 million in cash and entered into a Deferred Compensation
Agreement with Dr. Castle pursuant to which the Company has agreed to pay Dr.
Castle $2.6 million in 20 quarterly installments beginning March 1996. In June
1997, Dr. Castle and the Company amended the Deferred Compensation Agreement (i)
postponing the payment of any scheduled payments under the Deferred Compensation
Agreement until the earlier of (a) the issuance of any debt consented to by the
bank the proceeds of which are applied to pay amounts owed under the Bank Credit
Facility and the Interim Financing, or the closing of any equity offering the
proceeds of which are applied to pay amounts owed under the Bank Credit Facility
and the Interim Financing, and (b) January 31, 1998, at which time the scheduled
deferred compensation payments shall become payable beginning on the next
scheduled payment date, and (ii) deferring payment of the scheduled payments
under the Deferred Compensation Agreement which were not made on and after
September 30, 1996 until the earlier of (a) the closing of an initial public

49
<PAGE>
offering of the Company's Common Stock in which the gross proceeds are not less
than $25.0 million; provided, however, that such payments shall only be made in
the event the Company first pays any amounts owing under the Bank Credit
Facility and the Interim Financing; or (b) December 31, 2000. Amounts not paid
when scheduled under the Deferred Compensation Agreement bear interest at the
rate of 10% per annum. Proceeds of this offering will be used to pay amounts so
deferred under the Deferred Compensation Agreement. In the event the
Underwriters exercise their over-allotment option in full, the Company intends
to prepay the remaining $1.9 million balance due under the Deferred Compensation
Agreement. The Company has obtained the required consents under the Bank Credit
Facility to make the above-described payments of the Deferred Compensation
Agreement. See "Use of Proceeds." In connection with the purchase of the stock
of Jack H. Castle, D.D.S., Inc., the Company also entered into a management
services agreement with Jack H. Castle, D.D.S., P.C., a professional corporation
of which Dr. Castle is the sole owner. Pursuant to the management services
agreement, Dr. Castle receives an annual payment of $100,000 for services
performed in connection therewith.

The Company is party to a lease agreement with Goforth, Inc., a company
owned by Jack H. Castle, Jr., the Company's Chairman and Chief Executive
Officer. The lease agreement relates to the Castle Dental Center located at 2101
West Loop South in Houston, Texas, a 6,781 square foot free-standing building.
The Company has agreed to pay Goforth, Inc. a minimum guaranteed rental of
$12,000 per month through January 2001 and $13,200 per month from January 2001
through January 2006. The Company has also agreed to pay additional rent of
approximately $1,600 per month for insurance, taxes and common area maintenance.
The Company believes that this lease agreement is on terms no less favorable to
the Company than could have been obtained with an independent third party.

Pursuant to a Registration Rights Agreement dated as of December 18, 1995,
the members of the Castle Family and other parties have been granted certain
registration rights by the Company with respect to the shares of Common Stock
owned by them. See "Description of Capital Stock -- Registration Rights," and
"Certain Transactions."

STOCK OPTION PLANS

OMNIBUS STOCK AND INCENTIVE PLAN

In January 1996, the Board of Directors adopted, and the stockholders of
the Company approved, the Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan. The purpose of the Plan is to advance the interests of the
Company, by providing for the acquisition of an equity interest in the Company
by its key employees, directors, consultants and former consultants, by
providing additional incentives and motivation toward superior performance by
key employees and consultants of the Company, and by enabling the Company to
attract and retain the services of key employees and consultants on whose
judgment, interest and special effort the successful conduct of the Company's
operations is largely dependent. The aggregate amount of Common Stock with
respect to which grants under the Plan may be made may not exceed 750,000
shares.

The Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options and shares of restricted stock
(collectively, the "Awards"). Following the consummation of this offering, the
Plan will be administered by the Compensation Committee. Prior to the formation
of the Compensation Committee, the Plan was administered by the Company's full
Board of Directors. The Compensation Committee has, subject to the terms of the
Plan, the sole authority to grant Awards under the Plan, to construe and
interpret the Plan and to make all other determinations and take any and all
actions necessary or advisable for the administration of the Plan.

All of the employees, directors, consultants and former consultants of the
Company or its affiliates are eligible to receive Awards under the Plan. In
addition, key employees of entities managed by the Company may receive Awards.
Only key employees of the Company are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally be exercisable in installments pursuant to a vesting schedule to be
designated by the Compensation Committee. No option

50
<PAGE>
will remain exercisable later than ten years after the date of grant (or five
years from the date of grant in the case of ISOs granted to holders of more than
10% of the Common Stock). Restricted stock granted under the Plan will have such
terms, conditions and restrictions as the Compensation Committee shall
determine.

The exercise price for ISOs granted under the Plan may be no less than the
fair market value of the Common Stock on the date of grant (or 110% in the case
of ISOs granted to employees owning more than 10% of the Common Stock). The
exercise price for nonqualified options granted under the Plan will be
determined at the discretion of the Compensation Committee.

At the consummation of this offering, the Company anticipates that it will
have granted Awards to purchase approximately 510,000 shares of Common Stock
under the Plan at prices per share ranging from $10.00 to the initial public
offering price. Generally, the outstanding options are, and options to be
granted will be, exercisable one year from the date of grant as to 20% of the
underlying shares, and as to an additional 20% on each of the next four
anniversaries of the date of option grant.

DIRECTORS' STOCK OPTION PLAN

In August 1996, the Board of Directors adopted the Directors' Plan. The
purpose of the Directors' Plan is to encourage ownership of Common Stock by
eligible non-employee directors of the Company and to provide increased
incentive for such directors to render services and to exert maximum effort for
the business success of the Company. In addition, the Company believes that the
Directors' Plan will further strengthen the identification of directors with the
stockholders. The aggregate amount of Common Stock with respect to which grants
under the Directors' Plan may be made may not exceed 150,000 shares.

The Directors' Plan provides for the automatic grant of 25,000 nonqualified
stock options (the "Options") to non-employee directors at the time they
become directors. The Directors' Plan will be administered by the Compensation
Committee, which has, subject to the terms of the Directors' Plan, the sole
authority to grant Options under the Directors' Plan, to construe and interpret
the Directors' Plan and to make all other determinations and take any and all
actions necessary or advisable for the administration of the Directors' Plan.

All non-employee directors are eligible to receive Options under the
Directors' Plan. Options will be exercisable during a ten-year period from the
date of grant of the Options and will vest based upon the number of full years
of service a non-employee director serves on the Board of Directors as follows:
20% after one full year of service, 40% after two full years of service, 60%
after three full years of service, 80% after four full years of service and 100%
after five full years of service. No option will remain exercisable later than
ten years after the date of grant.

The exercise price for Options granted under the Directors' Plan may be no
less than the fair market value of the Common Stock on the date of grant.

The Company anticipates that upon the consummation of this offering it will
have outstanding Options to purchase a total of approximately 125,000 shares of
Common Stock under the Directors' Plan at the initial public offering price.

SECURITYHOLDERS AGREEMENT

On December 18, 1995, the Company, the Pecks Investors and the Castle
Family entered into the Securityholders Agreement (the "Securityholders
Agreement") pursuant to which (i) the Castle Family agreed not to sell or
otherwise transfer shares of Common Stock to any third party without first
offering the Pecks Investors the opportunity to participate in such sale or
transfer on a pro rata basis and on the same price and terms as those applicable
to the initiating seller and (ii) the Pecks Investors have the right to have one
designee nominated to the Board of Directors for so long as 20% of the Series A
Convertible Preferred Stock or 20% of the Common Stock issuable on conversion of
the Series A Convertible Preferred Stock is held by the Pecks Investors. The
right of the Pecks Investors to have a designee nominated to the Board of
Directors is also provided for in the Securities Purchase Agreement. The
provisions regarding Board of Director representation contained in the
Securityholders Agreement and the Securities Purchase Agreement will remain in
effect after this offering.

51
<PAGE>
401(K) PLAN

The Company's 401(k) Profit Sharing Plan (the "401(k) Plan") was adopted
by the Company effective August 1, 1996. All employees of the Company are
eligible to participate in the 401(k) Plan upon the completion of six months of
service. Participants may elect to defer receipt of compensation and have such
deferred amounts contributed to the 401(k) Plan up to a maximum of 20% of
compensation, with a minimum of 1% of compensation. The Company may match
contributions made by participants under the 401(k) Plan each year in an amount
determined by the Company on a year-to-year basis and makes profit sharing
contributions to the 401(k) Plan which are allocated to each participant's
account based on the qualifying participant's compensation in relation to the
total compensation of all qualifying participants. Participants are fully vested
with respect to their contributions, while the Company's contributions are
subject to vesting on the following basis: zero for fewer than two years of
employment and 20% per year cumulatively for the third through seventh years of
employment. Participants may borrow from their accounts under the 401(k) Plan.
The Company did not make any contributions to the 401(k) Plan in 1996.

CERTAIN TRANSACTIONS

Mr. Kahle, a director of the Company, is a Managing Director of The
GulfStar Group, Inc., which has provided investment banking and advisory
services to the Company. In 1995, the Company paid $540,000 in investment
banking fees to The GulfStar Group, and issued the GulfStar Warrant for 56,579
shares of Common Stock to GulfStar Investments, Ltd. The Company has paid The
GulfStar Group, Inc. for investment banking and financial advisory services
provided to the Company an amount equal to one percent of the total
consideration for each of the Company's acquisitions which has been consummated.
The GulfStar Group received approximately $195,000 in investment banking and
financial advisory fees from the Company in 1996. The directors of the Company
other than Mr. Kahle approve the payments made to The GulfStar Group, Inc. by
the Company.

Mr. Cresci, a director of the Company, is a Managing Director of Pecks
Management Partners Ltd., the investment advisor to the Pecks Investors, which
hold in the aggregate 1,244,737 shares of Series A Convertible Preferred Stock
and 485,382 shares of Series C Convertible Preferred Stock and the Senior
Subordinated Notes. Pursuant to the provisions of the Securities Purchase
Agreement, for so long as certain ownership thresholds with respect to Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock, or Common
Stock following conversion of Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock, are maintained, these investors have the
contractual right to nominate one member of the Company's Board of Directors.
See "Management -- Directors and Executive Officers." At the closing of this
offering, all of the shares of Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock will be converted into Common Stock and the Senior
Subordinated Notes will be paid. See "Use of Proceeds."

52
<PAGE>
owing under the Bank Credit Facility and the Interim Financing; or (b) December
31, 2000. Amounts not paid when scheduled under the Deferred Compensation
Agreement bear interest at the rate of 10% per annum. Proceeds of this offering
will be used to pay amounts so deferred under the Deferred Compensation
Agreement. In the event the Underwriters exercise their over-allotment option in
full, the Company intends to prepay the remaining $1.9 million balance due under
the Deferred Compensation Agreement. The Company has obtained the required
consents under the Bank Credit Facility to make the above-described payments of
the Deferred Compensation Agreement. See "Use of Proceeds." In connection with
the purchase of the stock of Jack H. Castle, D.D.S., Inc., the Company also
entered into a management services agreement with Jack H. Castle, D.D.S., P.C.,
a professional corporation of which Dr. Castle is the sole owner. Pursuant to
the management services agreement, Dr. Castle receives an annual payment of
$100,000 for services performed in connection therewith.

Pursuant to a Registration Rights Agreement dated as of December 18, 1995,
as amended, the Pecks Investors, GulfStar Investments, Ltd. and the members of
the Castle Family have been granted certain registration rights by the Company
with respect to the shares of Common Stock owned by them or acquired on
conversion of Series A Convertible Preferred Stock and Series C Convertible
Preferred Stock and exercise of the GulfStar Warrant. See "Description of
Capital Stock -- Registration Rights."

Pursuant to the Securityholders Agreement, the Pecks Investors are entitled
to certain rights with respect to their shares of capital stock. See
"Management -- Securityholders Agreement."

53
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth, as of August 15, 1997, certain information
regarding the beneficial ownership of shares of Common Stock, before giving
effect to this offering and after giving effect to the sale of the Common Stock
offered hereby, by each person known by the Company to be the beneficial owner
of more than 5% of the outstanding Common Stock, by each director or executive
officer of the Company and by all directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, a person is deemed to
be a "beneficial owner" of a security if he or she has or shares the power to
vote or direct the voting of such security, has or shares the power to dispose
of or direct the disposition of such security, or has the right to acquire the
security within 60 days. Accordingly, more than one person may be deemed to be a
beneficial owner of the same security.

PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES ------------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- --------------------------------------- ------------ -------- -----------
Jack H. Castle, Jr.(2)(3).............. 1,228,000 37.4% 21.6%
Jack H. Castle, D.D.S.(3).............. 871,000 26.6 15.1
Loretta Castle(3)...................... 871,000 26.6 15.1
Castle Interests, Ltd.(3).............. 514,000 15.7 8.9
Pecks Management Partners Ltd.(4)...... 948,243 28.9 16.4
Robert J. Cresci(5).................... 948,243 28.9 16.4
G. Kent Kahle(6)....................... 56,579 1.7 1.0
G. Daniel Siewert III(7)............... 10,000 * *
John M. Slack(8)....................... 4,000 * *
Elizabeth A. Tilney(9)................. -- -- --
Emmett E. Moore(9)(10)................. -- -- --
Louis A. Waters(9)(10)................. -- -- --
All directors and executive officers as
a group (12 persons)(11)............. 2,603,822 77.7% 44.4%

- ------------

* Less than 1%.

(1) Assumes no exercise of the Underwriters' over-allotment option.

(2) Includes 714,000 shares held by the Castle 1995 Gift Trust f/b/o Jack H.
Castle, Jr., of which Mr. Castle is Trustee. Excludes options to acquire
100,000 shares of Common Stock issued under the Plan.

(3) Includes 514,000 shares of Common Stock owned of record by Castle
Interests, Ltd., a Texas limited partnership of which Dr. Castle, Mrs.
Castle and Mr. Castle are the three general partners. The general partners
of Castle Interests, Ltd. cannot act to vote or dispose of shares of Common
Stock held by Castle Interests, Ltd. without the unanimous vote of all of
the general partners. Loretta Castle is the wife of Dr. Castle and the
mother of Jack H. Castle, Jr. The mailing address for each person or entity
is 1360 Post Oak Boulevard, Suite 1300, Houston, Texas 77056.

(4) 475,071, 94,074 and 136,407 of such shares are owned of record by Delaware
State Employees' Retirement Fund, Declaration of Trust for Defined Benefit
Plans of ICI American Holdings Inc. and Declaration of Trust for Defined
Benefit Plans of Zeneca Holdings Inc., respectively (the "Pecks
Investors"). Pecks Management Partners Ltd. ("Pecks"), as investment
manager for the Pecks Investors, has sole investment and voting power with
respect to such shares. These shares are represented by 1,244,737 shares of
Series A Convertible Preferred Stock, which is convertible into 705,552
shares of Common Stock, and 485,382 shares of Series C Convertible
Preferred Stock, which is convertible into 242,691 shares of Common Stock.
Mr. Cresci, a director of the Company, is a Managing Director of Pecks. The
principal business address for Pecks is One Rockefeller Plaza, New York,
New York 10020. Pecks disclaims beneficial ownership of such shares. Pecks
has advised the Company that it intends on behalf of the Pecks Investors to
convert all of the Series A Convertible Preferred Stock and Series C
Convertible Preferred Stock into Common Stock simultaneously with, and
conditioned on, the closing of this offering.

(5) Includes all shares deemed to be beneficially owned by Pecks, of which Mr.
Cresci is a Managing Director, and excludes options to acquire 25,000
shares of Common Stock under the Directors' Plan.

54
<PAGE>
As a result, Mr. Cresci may be deemed to share voting and investment power
with respect to such shares. Mr. Cresci disclaims beneficial ownership of
such shares. See note 4 above.

(6) Consists entirely of the beneficial ownership of shares of Common Stock
issuable on exercise of the GulfStar Warrant and excludes options to
acquire 25,000 shares of Common Stock under the Directors' Plan. Mr. Kahle
is a Managing Director of The GulfStar Group, Inc., an affiliate of
GulfStar Investments, Ltd., the holder of the GulfStar Warrant.

(7) Includes presently exercisable options to acquire 10,000 shares of Common
Stock issued under the Plan. Excludes options to acquire 100,000 shares of
Common Stock issued under the Plan.

(8) Includes presently exercisable options to acquire 4,000 shares of Common
Stock issued under the Plan. Excludes options to acquire 46,000 shares of
Common Stock issued under the Plan.

(9) Excludes options to acquire 25,000 shares of Common Stock under the
Directors' Plan.

(10) Messrs. Moore and Waters have agreed to serve as directors of the Company
upon the closing of this offering.

(11) Includes (i) 714,000 shares of Common Stock held by the Castle 1995 Gift
Trust f/b/o Jack H. Castle, Jr., (ii) 514,000 shares of Common Stock held
by Castle Interests, Ltd., (iii) 705,552 shares of Common Stock issued on
conversion of 1,244,737 shares of Series A Convertible Preferred Stock, and
242,691 shares of Common Stock issued on conversion of 485,382 shares of
Series C Convertible Preferred Stock, all of which are beneficially owned
by the Pecks Investors, and (iv) 56,579 shares of Common Stock issuable to
GulfStar Investments, Ltd. on exercise of the GulfStar Warrant.

55
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 35,000,000 shares
of capital stock which includes 30,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock ("Preferred Stock"). Of the Preferred Stock,
1,244,737 shares have been designated Series A Convertible Preferred Stock, all
of which will be converted into an aggregate of 705,552 shares of Common Stock
at the closing of this offering, 119,231 shares have been designated Series B
Convertible Preferred Stock, all of which will be issued as partial
consideration for the Austin Acquisition, and 485,382 shares have been
designated Series C Convertible Preferred Stock, all of which will be converted
into 242,691 shares of Common Stock at the closing of this offering.

COMMON STOCK

Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and such
holders do not have cumulative voting rights. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors of the Company out of funds legally
available therefor. See "Dividend Policy." All outstanding shares of Common
Stock are, and the shares to be sold in this offering when issued and paid for
will be, fully paid and nonassessable, and the holders thereof will have no
preferences or conversion, exchange or preemptive rights. In the event of any
liquidation, dissolution or winding-up of the affairs of the Company, holders of
Common Stock will be entitled to share ratably in the assets of the Company
remaining after payment or provision for payment of all of the Company's debts
and obligations and liquidation payments to holders of outstanding shares of
Preferred Stock, if any.

PREFERRED STOCK

The Preferred Stock may be issued in one or more series without further
stockholder authorization, and the Board of Directors is authorized to fix and
determine the terms, limitations and relative rights and preferences of the
Preferred Stock, to establish series of Preferred Stock and to fix and determine
the variations as among series. The Preferred Stock may be subject to repurchase
or redemption by the Company. The Board of Directors, without approval of the
holders of the Common Stock, can issue Preferred Stock with voting and
conversion rights (including multiple voting rights) which could adversely
affect the rights of holders of Common Stock. The Company has designated (i)
1,244,737 shares of Preferred Stock as Series A Convertible Preferred Stock, all
of which are issued and outstanding and owned by the Pecks Investors, (ii)
119,231 shares of Preferred Stock as Series B Convertible Preferred Stock which
will be issued in connection with the Austin Acquisition, and (iii) 485,382
shares of Preferred Stock as Series C Convertible Preferred Stock, all of which
are issued and outstanding and owned by the Pecks Investors. See "Principal
Stockholders." All of the shares of Series A Convertible Preferred Stock will
be converted into an aggregate of 705,552 shares of Common Stock at the closing
of this offering. All of the shares of Series C Convertible Preferred Stock will
be converted into an aggregate of 242,691 shares of Common Stock at the closing
of this offering.

The Series B Convertible Preferred Stock has a liquidation preference of
$1.6 million and is convertible at the option of the holder into Common Stock on
a share for share basis during the 30 day period commencing 12 months after the
date of issuance of such shares and ending on the 30th day thereafter (the
"Conversion Period"). At the option of the holder of the Series B Convertible
Preferred Stock, during the Conversion Period all but not less than all of the
shares of Series B Convertible Preferred Stock are mandatorily redeemable by the
Company with redemption payments to be made in 16 equal quarterly redemption
payments of $114,000. Following the Conversion Period, all but not less than all
of the shares of Series B Convertible Preferred Stock may be optionally redeemed
at any time by the Company in 16 equal quarterly redemption payments of
$114,000. Shares of Series B Convertible Preferred Stock are entitled to one
vote on all matters submitted to stockholders for a vote for each share of
Common Stock into which Series B Convertible Preferred Stock is convertible.

56
<PAGE>
Although the Company has no present plans to issue any additional shares of
Preferred Stock following the closing of this offering, the issuance of
additional shares of Preferred Stock, or the issuance of rights to purchase such
shares, may have the effect of delaying, deferring or preventing a change in
control of the Company or an unsolicited acquisition proposal.

CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS

GENERAL

A number of provisions of the Company's Certificate of Incorporation (the
"Certificate") and Bylaws concern matters of corporate governance and the
rights of stockholders. Certain of these provisions, as well as the ability of
the Board of Directors to issue shares of Preferred Stock and to set the voting
rights, preferences and other terms thereof, may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which certain stockholders may deem
to be in their best interests). To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of the Company's Common Stock, which
may result from actual or rumored takeover attempts, may be inhibited. These
provisions, together with the ability of the Board of Directors to issue
Preferred Stock without further stockholder action, also could delay or
frustrate the removal of incumbent directors or the assumption of control by
stockholders, even if such removal or assumption would be beneficial to
stockholders of the Company. These provisions also could discourage or make more
difficult a merger, tender offer or proxy contest, even if a transaction or
contest could be favorable to the interests of stockholders, and could
potentially depress the market price of the Common Stock. The Board of Directors
of the Company believes that these provisions are appropriate to protect the
interests of the Company and all of its stockholders. The Board of Directors has
no present plans to adopt any other measures or devices which may be deemed to
have an "anti-takeover effect."

MEETINGS OF STOCKHOLDERS

The Company's Bylaws provide that a special meeting of stockholders may be
called only by the Chief Executive Officer, by a majority of the Board of
Directors, or by a majority of the executive committee (if any). The Company's
Bylaws provide that only those matters set forth in the notice of the special
meeting may be considered or acted upon at that special meeting.

NO STOCKHOLDER ACTION BY WRITTEN CONSENT

The Certificate provides that any action required or permitted to be taken
by the stockholders of the Company at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders in lieu thereof.

INDEMNIFICATION AND LIMITATION OF LIABILITY

The Certificate of the Company provides that directors and officers of the
Company shall be, and at the discretion of the Board of Directors non-officer
employees and agents may be, indemnified by the Company to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended,
against all expenses and liabilities actually and reasonably incurred in
connection with service for or on behalf of the Company, and further permits the
advancing of expenses incurred in defense of claims. The Certificate also
contains a provision permitted by Delaware law that generally eliminates the
personal liability of directors for monetary damages for breaches of their
fiduciary duty.

AMENDMENT OF THE BYLAWS

The Bylaws of the Company provide that an amendment or repeal thereof must
first be approved by the Board of Directors or by affirmative vote of the
holders of at least 66 2/3% of the total votes eligible to be cast by holders of
voting stock with respect to such amendment or repeal.

57
<PAGE>
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS

The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure").

The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the form and timing of that
notice are specified in the Company's Bylaws. If the Chairman of the Board of
Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.

Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of the Company. The requirements as to the form and timing of
that notice are specified in the Company's Bylaws. If the Chairman of the Board
of Directors determines that the other business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.

Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.

DELAWARE TAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law which, with certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or after such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. An "interested stockholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation who was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.

REGISTRATION RIGHTS

The Company has granted to the Pecks Investors, the Castle Family and
GulfStar Investments Ltd. certain registration rights pursuant to a Registration
Rights Agreement dated December 18, 1995 (the "Registration Rights
Agreement"). Additionally, the Company has granted certain registration rights
in connection with its acquisitions of assets of affiliated dental practices in
which a component of the consideration for the acquisition was Common Stock. A
total of 3,399,470 shares of Common Stock and

58
<PAGE>
shares of Common Stock issuable on conversion of the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock presently have some form of registration rights. See
"Principal Stockholders."

The Registration Rights Agreement grants the Pecks Investors holding at
least 50% of the Common Stock issuable on conversion of the Series A Convertible
Preferred Stock the right to request the registration of all or part of such
Common Stock. On receipt of such request, the Company is required to use its
best efforts to effect such registration. The Pecks Investors may exercise their
right to request registration twice following the consummation of this offering.
Additionally, following the consummation of this offering, the Pecks Investors
holding at least 20% of the Common Stock issuable on conversion of the Series A
Convertible Preferred Stock and Series C Convertible Preferred Stock have the
right to request an unlimited number of registrations of all or part of their
Common Stock on Form S-3 at such time as the Company is eligible to use such
form. All registrations pursuant to the Registration Rights Agreement are
undertaken at the Company's expense other than underwriting discount.

If the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of holders of Common
Stock exercising registration rights, the Company is required to give notice to
all parties to whom the Company has granted registration rights and to offer to
include any shares of Common Stock owned by such parties in such registration.
The exercise of these rights is subject to a number of conditions, including the
right of the underwriters of such offering to limit the number of shares
included in such registration. In the event the underwriters so limit the number
of shares to be included in a registration, any shares requested to be included
in such registration by the Pecks Investors, the Castle Family and GulfStar
Investments Ltd. shall be included prior to the inclusion of any shares of
Common Stock requested to be included by any other party.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is Harris
Trust and Savings Bank.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, and giving effect to the conversion of
the Series A Convertible Preferred Stock and Series C Convertible Preferred
Stock, the Company will have 5,780,239 shares of Common Stock outstanding
(6,055,239 shares of Common Stock if the Underwriters exercise their over-
allotment option in full). Up to 69,879 shares of Common Stock are presently
issuable on the conversion of two Seller Notes issued by the Company, and
119,231 shares of Common Stock are issuable on conversion of the Series B
Convertible Preferred Stock. Of the outstanding shares, the 2,500,000 shares
sold in this offering (2,875,000 shares if the Underwriters exercise their
over-allotment option in full) will be freely tradeable without restriction or
limitation under the Securities Act, except to the extent such shares are
subject to the agreement with the Underwriters described below, and except for
any such shares which may be acquired by an "affiliate" of the Company as that
term is defined in Rule 144 ("Affiliate"). The 3,280,239 remaining shares
constitute "restricted securities" within the meaning of Rule 144, and will
only be eligible for sale in the open market commencing on the first anniversary
of the date such shares were acquired from the Company or an Affiliate, subject
to contractual lockup provisions and applicable requirements of Rule 144 and
Rule 701 ("Rule 701") described below. Some of such restricted securities,
however, are subject to registration rights which may entitle the holder thereof
to register such shares for resale under the Securities Act and to sell such
shares after the lockup period without regard for the restrictions of Rule 144.
The restricted shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. The Company will also have outstanding the GulfStar Warrant, which is
exercisable for 56,579 shares of Common Stock at $11.00 per share, and such
shares will be eligible for resale subject to the volume, holding period and
certain other limitations of Rule 144 upon their exercise or conversion, as
applicable.

In general, under Rule 144, as currently in effect, if a period of at least
one year has elapsed between the later of the date on which restricted
securities were acquired from the Company or the date on which

59
<PAGE>
they were acquired from an Affiliate, then the holder of such restricted
securities (including an Affiliate) is entitled to sell a number of shares
within any three-month period that does not exceed the greater of (i) one
percent of the then outstanding shares of the Common Stock or (ii) the average
weekly reported volume of trading of the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements pertaining to the manner of such sales, notices of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in accordance
with the foregoing volume limitations and other requirements but without regard
to the one-year holding period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted securities
were acquired from the Company and the date on which they were acquired from an
Affiliate, a holder of such restricted securities who is not an Affiliate at the
time of the sale and has not been an Affiliate for at least three months prior
to the sale would be entitled to sell the shares immediately without regard to
the volume limitations and other conditions described above.

The Company, its directors and executive officers and all of the
stockholders of the Company have agreed that, for a period of 180 days after the
date of this Prospectus (the "Lock-up Period"), they will not, without the
prior written consent of J. C. Bradford & Co., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for any shares of Common Stock; provided,
however, that the Company may issue shares of Common Stock in connection with
acquisitions to parties that agree to be bound by the same restriction on offers
and sales. After this offering, sales of substantial amounts of Common Stock by
existing stockholders could have an adverse impact on the market price of the
Common Stock. No predictions can be made as to the effect, if any, that market
sales of shares by existing stockholders or the availability of such shares for
future sale will have on the market price of shares of Common Stock prevailing
from time to time.

Under the Plan and the Directors' Plan, there is an aggregate of 900,000
shares reserved for issuance. As of the closing of this offering, the Company
anticipates that it will have issued options to purchase 635,000 shares of
Common Stock pursuant to the Plan and the Directors' Plan, 21,850 of which are
currently exercisable. As soon as practicable following the consummation of the
offering, the Company intends to file a registration statement under the
Securities Act to register the shares of Common Stock reserved for issuance
under the Plan and the Directors' Plan. Shares of Common Stock issued pursuant
to the Plan and the Directors' Plan after the effective date of such
registration statement will be available for sale in the open market, subject to
vesting provisions related to such shares and the Lock-up Period. If the Company
does not file such a registration statement during the Lock-up Period, holders
of shares issuable upon exercise of options will be able to rely on the
exemption from registration under Rule 701. Securities issued in reliance on
Rule 701 are restricted securities and at the expiration of the Lock-up Period,
may be sold by persons other than Affiliates subject only to the manner of sale
provisions of Rule 144 and by Affiliates under Rule 144 without compliance with
its one-year minimum holding period.

60
<PAGE>
UNDERWRITING

Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co. and Southcoast Capital Corporation, as representatives of the several
Underwriters (the "Representatives"), have agreed, severally, to purchase from
the Company the number of shares of Common Stock set forth below opposite their
respective names.

NUMBER OF
NAME OF UNDERWRITER SHARES
- ------------------------------------- ----------
J.C. Bradford & Co................... 835,000
Southcoast Capital Corporation....... 835,000
BT Alex.Brown Incorporated........... 40,000
Cowen & Company...................... 40,000
A.G. Edwards & Sons, Inc............. 40,000
Goldman, Sachs & Co.................. 40,000
Lehman Brothers Inc.................. 40,000
Montgomery Securities................ 40,000
Oppenheimer & Co., Inc............... 40,000
Prudential Securities Incorporated... 40,000
Robert W. Baird & Co. Incorporated... 30,000
William Blair & Company, L.L.C....... 30,000
Dain Bosworth Incorporated........... 30,000
Equitable Securities Corporation..... 30,000
Interstate/Johnson Lane
Corporation........................ 30,000
Legg Mason Wood Walker,
Incorporated....................... 30,000
McDonald & Company Securities,
Inc................................ 30,000
Morgan Keegan & Company, Inc......... 30,000
Needham & Company, Inc............... 30,000
Piper Jaffray Inc.................... 30,000
Rauscher Pierce Refsnes, Inc......... 30,000
Raymond James & Associates, Inc...... 30,000
The Robinson-Humphrey Company,
Inc................................ 30,000
Sanders Morris Mundy Inc............. 30,000
Southwest Securities, Inc............ 30,000
Wedbush Morgan Securities Inc........ 30,000
Wheat, First Securities, Inc......... 30,000
----------
Total........................... 2,500,000
==========

In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all shares of Common Stock
offered hereby if any such shares are purchased.

The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $0.55 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per share to certain other dealers. After the initial
public offering, the public offering price and such concessions may be changed.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.

The offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of shares.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days from the date of this Prospectus, to purchase up to an
aggregate of 375,000 additional shares of Common Stock to cover over-allotments,
if any. To the extent the Underwriters exercise this option, each of the
Underwriters

61
<PAGE>
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of Common Stock to be purchased by it shown
in the table above bears to the total number of shares in such table, and the
Company will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the 2,500,000 shares of
Common Stock offered hereby. If purchased, the Underwriters will sell these
additional shares on the same terms as those on which the 2,500,000 shares are
being offered.

Subject to applicable limitations, the Underwriters, in connection with the
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account, or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time. Subject to applicable limitations, the Underwriters may also place
bids or make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with the offering.

Prior to this offering, there has been no public market for the Common
Stock. The offering price has been determined by negotiations among the Company
and the Representatives. In determining such price, consideration was given to,
among other things, the financial and operating history and trends of the
Company, the experience of its management, the position of the Company in its
industry, the Company's prospects and the Company's financial results.
Additionally, consideration was given to the status of the securities markets,
market conditions for new offerings of securities and the prices of similar
securities of comparable companies.

The Company, its executive officers and directors and all of the
stockholders of the Company have agreed with the Representatives not to offer,
sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for any shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of the Representatives; provided, however, that the Company may
issue shares of Common Stock in connection with acquisitions to parties that
agree to be bound by the same restrictions on offers and sales. After such
180-day period, these persons will be entitled to sell, distribute or otherwise
dispose of the Common Stock, subject to the provisions of applicable securities
laws.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
that the Underwriters or any such controlling persons may be required to make in
respect thereof.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed on for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal matters
related to the offering will be passed on for the Underwriters by Bass, Berry &
Sims PLC, Nashville, Tennessee.

EXPERTS

The financial statements and financial statement schedule of Castle Dental
Centers, Inc. and the financial statements of the affiliated dental practices
acquired by Castle Dental Centers, Inc. for the indicated periods ended December
31, 1993, 1994, 1995 and 1996, as detailed in the index beginning on page F-1
included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Coopers & Lybrand L.L.P., independent
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.

62
<PAGE>
ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall encompass any and all
amendments thereto) on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain items of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is hereby made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. For further information with
respect to the Company, reference is hereby made to the Registration Statement
and such exhibits and schedules filed as a part thereof, which may be inspected,
without charge, at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission maintains a web site that
contains reports, proxy and information statements regarding registrants that
file electronically with the Commission. The address of this web site is
(http://www.sec.gov). Copies of all or any portion of the Registration Statement
may be obtained from the Public Reference Section of the Commission, upon
payment of the prescribed fees.

<PAGE>
INDEX TO FINANCIAL STATEMENTS

PAGE
-----
CASTLE DENTAL CENTERS, INC.
Unaudited Pro Forma Consolidated
Financial Information.......... F-3
Unaudited Pro Forma Consolidated
Balance Sheet as of June 30,
1997........................... F-4
Notes to Unaudited Pro Forma
Consolidated Balance Sheet..... F-5
Unaudited Pro Forma Consolidated
Statement of Operations for the
year ended
December 31, 1996............. F-7
Unaudited Pro Forma Consolidated
Statement of Operations for the
six months
ended June 30, 1997........... F-8
Notes to Unaudited Pro Forma
Consolidated Statement of
Operations..................... F-9
CASTLE DENTAL CENTERS, INC.
Report of Independent
Accountants.................... F-12
Balance Sheets as of December
31, 1995 and 1996.............. F-13
Statements of Operations for the
years ended December 31, 1994,
1995 and 1996.................. F-14
Statements of Changes in
Stockholders' Equity (Deficit)
for the years ended December
31, 1994, 1995 and 1996........ F-15
Statements of Cash Flows for the
years ended December 31, 1994,
1995 and 1996.................. F-16
Notes to Financial Statements... F-17
CASTLE DENTAL CENTERS, INC.
Condensed Consolidated Balance
Sheets (Unaudited) as of
December 31, 1996 and
June 30, 1997................. F-32
Condensed Consolidated
Statements of Operations
(Unaudited) for the six months
ended June 30, 1996 and 1997... F-33
Condensed Consolidated
Statements of Cash Flows
(Unaudited) for the six months
ended June 30, 1996 and 1997... F-34
Notes to Condensed Consolidated
Financial Statements
(Unaudited).................... F-35
SW DENTAL ASSOCIATES
Report of Independent
Accountants.................... F-38
Balance Sheets as of December
31, 1995 and 1996.............. F-39
Statements of Operations for the
years ended December 31, 1995
and 1996....................... F-40
Statements of Changes in
Members' Equity (Deficit) for
the year ended December 31,
1995 and 1996.................. F-41
Statements of Cash Flows for the
year ended December 31, 1995
and 1996....................... F-42
Notes to Financial Statements... F-43
SW DENTAL ASSOCIATES
Condensed Balance Sheets
(Unaudited) as of December 31,
1996, and June 30, 1997........ F-47
Condensed Statements of
Operations (Unaudited) for the
six months ended June 30, 1996
and 1997....................... F-48
Condensed Statements of Cash
Flows (Unaudited) for the six
months ended June 30, 1996 and
1997........................... F-49
Notes to Condensed Financial
Statements (Unaudited)......... F-50
1ST DENTAL CARE
Report of Independent
Accountants.................... F-51
Combined Balance Sheets as of
December 31, 1994 and 1995..... F-52
Combined Statements of
Operations for the years ended
December 31, 1993,
1994 and 1995................. F-53
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1993, 1994 and
1995........................... F-54
Combined Statements of Cash
Flows for the years ended
December 31, 1993,
1994 and 1995................. F-55
Notes to Combined Financial
Statements..................... F-56

F-1
<PAGE>
PAGE
-----
MID-SOUTH DENTAL CENTERS
Report of Independent
Accountants.................... F-61
Balance Sheets as of December
31, 1994 and 1995.............. F-62
Statements of Operations for the
years ended December 31, 1993,
1994 and 1995.................. F-63
Statements of Changes in
Stockholder's Equity for the
years ended December 31, 1993,
1994 and 1995.................. F-64
Statements of Cash Flows for the
years ended December 31, 1993,
1994 and 1995.................. F-65
Notes to Financial Statements... F-66
HORIZON DENTAL CENTERS
Report of Independent
Accountants.................... F-71
Combined Balance Sheet as of
December 31, 1995.............. F-72
Combined Statements of
Operations for the years ended
December 31, 1994 and 1995..... F-73
Combined Statements of Changes
in Stockholder's Equity
(Deficit) for the years ended
December 31, 1994 and 1995..... F-74
Combined Statements of Cash
Flows for the years ended
December 31, 1994 and 1995..... F-75
Notes to Combined Financial
Statements..................... F-76

F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1997 and the Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1996 and the six months ended June 30, 1997 have been
prepared to reflect adjustments to the Company's historical financial position
and results of operations to give effect to the transactions described below.
The Unaudited Pro Forma Consolidated Balance Sheet reflects such transactions as
if they had occurred as of June 30, 1997, and the Unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31, 1996 and
for the six months ended June 30, 1997 reflect such transactions as if they had
occurred as of January 1, 1996. Initially capitalized terms not otherwise
defined herein shall have the meaning assigned to them in the accompanying
Prospectus.

In May 1996, the Company acquired the assets and assumed certain
liabilities of 1st Dental Care headquartered in Clearwater, Florida, and
Mid-South Dental Centers headquartered in Nashville, Tennessee, and entered into
management services agreements with each of those groups. In August 1996, the
Company increased its dental practices under management in Texas by acquiring
Horizon Dental Centers, a group dental practice with four offices in Ft. Worth,
Texas and four offices in Austin, Texas. In June 1997, the Company entered into
a management services agreement with and agreed to acquire a multi-location
dental practice that operates four dental centers in the Austin, Texas
metropolitan area. The closing of the Austin Acquisition is a condition of, and
will occur contemporaneously with, the closing of this offering.

In June 1997, the Company amended the Securities Purchase Agreement with
the Pecks Investors pursuant to which the Company issued an additional $2.0
million in Senior Subordinated Notes and 485,382 shares of Series C Convertible
Preferred Stock (the "Interim Financing").

The Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997
gives effect to (i) the sale of 2,500,000 shares of Common Stock offered by the
Company hereby and the application of the net proceeds therefrom, as described
in "Use of Proceeds," (ii) the conversion of the Series A and Series C
Convertible Preferred Stock into an aggregate of 948,243 shares of Common Stock,
and (iii) the Austin Acquisition and the issuance of 119,231 shares of Series B
Convertible Preferred Stock, as if each of such transactions had occurred as of
June 30, 1997. The Unaudited Pro Forma Consolidated Statement of Operations for
the year ended December 31, 1996, and six months ended June 30, 1997 give effect
to (i) the Interim Financing, (ii) the sale of 2,500,000 shares of Common Stock
offered by the Company hereby and the application of net proceeds therefrom as
described in "Use of Proceeds" and (iii) the Acquisition Transactions, as if
each of such transactions had occurred as of January 1, 1996.

The pro forma consolidated financial statements have been prepared by the
Company based on the historical financial statements of the Company and the
affiliated dental practices acquired or to be acquired in the Acquisition
Transactions, the financial statements of which are included elsewhere in this
Prospectus. These pro forma consolidated financial statements are presented for
illustrative purposes only and are not necessarily indicative of the results
that would have been obtained if the transactions had occurred on the dates
indicated or that may be realized in the future. The pro forma information
should be read in conjunction with the Company's Financial Statements and the
Unaudited Condensed Consolidated Interim Financial Statements and the Notes
thereto and the historical financial statements of the dental practices acquired
or to be acquired in the Acquisition Transactions and the Notes thereto included
elsewhere in this Prospectus.

F-3
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA HISTORICAL -------------------------
HISTORICAL ----------- ----------- AUSTIN
---------- OFFERING AUSTIN ACQUISITION
COMPANY ADJUSTMENTS ACQUISITION ADJUSTMENTS
(A) (B) (C) (C) AS ADJUSTED
---------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,488 $ 4,447 $ 26 $(3,650) $ 2,311
Patient receivables, net........... 5,855 -- 276 -- 6,131
Prepaid expenses and other current
assets.......................... 174 -- 105 -- 279
Deferred income taxes.............. 284 -- -- -- 284
---------- ----------- ----------- ----------- -----------
Total current assets....... 7,801 4,447 407 (3,650) 9,005
---------- ----------- ----------- ----------- -----------
Property and equipment, net.......... 4,155 -- 378 100 4,633
Intangible assets, net............... 16,096 -- -- 6,459 22,555
Other assets......................... 3,466 (306) 3 (1,612) 755
(796)(D)
Deferred income taxes................ 649 -- -- -- 649
---------- ----------- ----------- ----------- -----------
Total assets.................... $ 32,167 $ 3,345 $ 788 $ 1,297 $37,597
========== =========== =========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Revolving line of credit........... $ 1,270 $(1,270) $ -- $ -- $ --
Current portion of long-term debt
and capital lease obligations... 12,737 (11,983) 126 -- 880
Accounts payable and accrued
liabilities..................... 4,939 (263) 224 (101) 4,714
(85)(D)
Due to affiliated dental
practices....................... 833 -- -- -- 833
---------- ----------- ----------- ----------- -----------
Total current
liabilities............. 19,779 (13,601) 350 (101) 6,427
---------- ----------- ----------- ----------- -----------
Long-term debt and capital lease
obligations, less current
portion............................ 10,327 (7,564) 286 -- 3,049
Other long-term liabilities.......... 1,578 (263) 1,315
Redeemable preferred stock........... 4,381 (4,381)(E) -- 1,550 1,550
Stockholders' equity (deficit):
Common stock....................... 2 3 1 (1) 6
1(E)
Additional paid-in capital......... 3,107 28,522 -- -- 36,009
4,380(E)
Retained earnings (accumulated
deficit)........................ (7,007) (3,752) 151 (151) (10,759)
---------- ----------- ----------- ----------- -----------
Total stockholders' equity
(deficit)............... (3,898) 29,154 152 (152) 25,256
---------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)................... $ 32,167 $ 3,345 $ 788 $ 1,297 $37,597
========== =========== =========== =========== ===========
</TABLE>
F-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(A) Represents the June 30, 1997 historical consolidated balance sheet of the
Company, which includes the assets and liabilities acquired from 1st Dental
Care and Mid-South Dental Centers, in May 1996, and the assets and
liabilities acquired from Horizon Dental Centers, in August 1996.

(B) Represents the issuance of 2.5 million shares of Common Stock offered by
the Company hereby and the use of proceeds therefrom, as follows:

IN THOUSANDS
------------
Gross proceeds of the offering.......... $ 32,500
Underwriting discount................... (2,275)
Expenses related to the offering........ (1,700)
------------
Net proceeds....................... 28,525(1)
Repayment of debt, including current
portion............................... (24,263)(2)
Expenses related to the offering that
have been paid as of June 30, 1997.... 711
Payment of amounts due under the
Deferred Compensation
Agreement with Jack H. Castle, D.D.S.
(current portion $263,000, long-term
$263,000)............................. (526)
------------
Net increase in cash and cash
equivalents...................... $ 4,447
============

The Company plans to use the net increase in cash and cash equivalents to
fund the Austin Acquisition.

(1) The Common Stock to be issued will affect pro forma equity,
as follows:

IN THOUSANDS
------------
Common stock....................... $ 3
Additional paid-in capital......... 28,522
------------
$ 28,525
============

(2) The repayment of long-term debt will affect pro forma assets
and liabilities, as follows:

IN THOUSANDS
------------
Other assets....................... $ (306)(a)
Revolving line of credit........... 1,270
Current portion of long-term
debt............................. 11,983
Long-term debt, net of unamortized
discount of $3,446............... 7,564
Retained earnings.................. 3,752(b)
------------
Cash paid................ $ 24,263
============

- ------------

(a) To charge to expense deferred financing costs related to the
retirement of the Senior Subordinated Notes.

(b) To reflect the reduction in retained earnings for the
extraordinary charge resulting from the retirement of the
Senior Subordinated Notes, with no income tax effect.

(C) Represents the June 30, 1997 historical balance sheet of SW Dental, the
affiliated dental practice to be acquired in the Austin Acquisition, and
the purchase adjustments thereto.

F-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)

The estimated fair value of the assets to be acquired in the Austin
Acquisition is summarized below:

IN THOUSANDS
------------
Cash.................................... $ 26
Patient receivables, net................ 276
Prepaid expenses and other current
assets................................ 105
Property and equipment.................. 478
Other assets............................ 3
Management services agreement........... 6,459
Current portion of long-term debt and
capital leases assumed................ (126)
Accounts payable and accrued liabilities
assumed............................... (123)
Long-term debt and capital lease
obligations assumed................... (286)
------------
$ 6,812
============

The aggregate acquisition price for the Austin Acquisition will be funded
as follows:

IN THOUSANDS
------------
Cash.................................... $ 3,650
Escrow deposit and acquisition costs.... 1,612
Series B Convertible Preferred Stock.... 1,550
------------
$ 6,812
============

The excess of cost over the fair value of the net assets acquired will be
amortized over the estimated life, which is 25 years.

(D) Represents costs capitalized in connection with the offering that have been
paid or accrued as of June 30, 1997. The costs will be netted against
additional paid in capital upon completion of the offering.

(E) Represents the conversion of 1,244,737 shares of Series A and 485,382
shares of Series C Convertible Preferred Stock into an aggregate of
948,243 shares of Common Stock.

F-6
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
HISTORICAL OFFERING HISTORICAL
---------------------- AND INTERIM ------------
COMPLETED COMPLETED FINANCING AUSTIN
COMPANY ACQUISITIONS ACQUISITIONS ADJUSTMENTS ACQUISITION
(A) (B) ADJUSTMENTS COMBINED (C) (D)
------- ------------ --------------- -------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Patient revenues of affiliated dental
practices............................. $29,601 $ 8,118 $-- $37,719 $-- $ 4,850
Amounts retained by affiliated dental
practices............................. 9,981 -- 732(E) 10,713 -- --
------- ------------ --------------- -------- ----------- ------------
Net revenues............................ 19,620 8,118 (732) 27,006 -- 4,850
Expenses:
Dentists' salaries.................. -- 832 (832)(E) -- -- 1,138
Professional fees and clinic
expenses.......................... -- 1,997 -- 1,997 -- --
Clinical salaries................... 4,233 1,696 -- 5,929 -- 1,249
Dental supplies and laboratory
fees.............................. 3,120 490 -- 3,610 -- 621
Management fees..................... -- 538 (538)(F) -- -- --
Rental and lease expense............ 1,592 532 5(G) 2,129 -- 137
Advertising and marketing........... 1,522 290 25(H) 1,837 -- 197
Depreciation and amortization....... 1,088 129 240(I) 1,457 (55)(L) 100
Other operating expenses............ 2,913 394 -- 3,307 -- 511
General and administrative.......... 4,292 859 91(J) 5,242 -- 351
------- ------------ --------------- -------- ----------- ------------
Total expenses................. 18,760 7,757 (1,009) 25,508 (55) 4,304
------- ------------ --------------- -------- ----------- ------------
Operating income (loss)................. 860 361 277 1,498 55 546
Interest expense........................ 2,596 108 351(K) 3,055 (2,896)(M) 34
240(K)
Other expense (income).................. (89) -- -- (89) -- --
------- ------------ --------------- -------- ----------- ------------
Income (loss) before income taxes....... (1,647) 253 (74) (1,468) 2,711 512
Provision (benefit) for income taxes.... (561) -- 61(N) (500) 923(N) --
------- ------------ --------------- -------- ----------- ------------
Net income (loss)....................... $(1,086) $ 253 $ (135) $ (968) $ 1,788 $ 512
======= ============ =============== ======== =========== ============
Net income (loss) per share (P)......... $(0.30)
=======
Weighted average outstanding shares
(P)................................... 3,598
=======
</TABLE>
PRO FORMA
---------------------------
AUSTIN
ACQUISITION
ADJUSTMENTS AS ADJUSTED
------------- -----------

Patient revenues of affiliated dental
practices............................. $-- $42,569
Amounts retained by affiliated dental
practices............................. 1,138(E) 11,851
------------- -----------
Net revenues............................ (1,138) 30,718
Expenses:
Dentists' salaries.................. (1,138)(E) --
Professional fees and clinic
expenses.......................... -- 1,997
Clinical salaries................... -- 7,178
Dental supplies and laboratory
fees.............................. -- 4,231
Management fees..................... -- --
Rental and lease expense............ -- 2,266
Advertising and marketing........... -- 2,034
Depreciation and amortization....... 278(I) 1,780
Other operating expenses............ -- 3,818
General and administrative.......... 215(J) 5,808
------------- -----------
Total expenses................. (645) 29,112
------------- -----------
Operating income (loss)................. (493) 1,606
Interest expense........................ 433

Other income ........................... -- (89)
------------- -----------
Income (loss) before income taxes....... (493) 1,262
Provision (benefit) for income taxes.... 7(N) 430
------------- -----------
Net income (loss)....................... $ (500) $ 832
============= ===========
Net income (loss) per share (P)......... $ 0.14
===========
Weighted average outstanding shares(P).. 5,745
===========

F-7
<PAGE>
CASTLE DENTAL CENTERS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL PRO FORMA
HISTORICAL ------------ ------------ -----------------------------
-------- OFFERING AUSTIN AUSTIN
COMPANY ADJUSTMENTS ACQUISITION ACQUISITION
(A) (C) (D) ADJUSTMENTS AS ADJUSTED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Patient revenues of affiliated dental
practices.......................... $21,327 $ -- $2,623 $-- $ 23,950
Amount retained by affiliated dental
practices.......................... 6,954 -- -- 651(E) 7,605
-------- ------------ ------------ ------------ ------------
Net revenues......................... 14,373 -- 2,623 (651) 16,345
-------- ------------ ------------ ------------ ------------
Expenses:
Dentists' salaries.............. -- -- 635 (635)(E) --
Clinical salaries............... 2,781 -- 752 -- 3,533
Dental supplies and laboratory
fees.......................... 1,967 -- 346 -- 2,313
Rental and lease expense........ 1,258 -- 58 -- 1,316
Advertising and marketing....... 1,031 -- 89 -- 1,120
Depreciation and amortization... 963 (28)(L) 50 140(I) 1,125
Other operating expenses........ 1,784 -- 174 -- 1,958
General and administrative...... 3,047 -- 232 82(J) 3,361
-------- ------------ ------------ ------------ ------------
Total expenses 12,831 (28) 2,336 (413) 14,726
-------- ------------ ------------ ------------ ------------
Operating income (loss).............. 1,542 28 287 (238) 1,619
Interest expense..................... 1,683 (1,625)(M) 17 -- 187
112(K)
Other income ........................ (12) -- -- -- (12)
-------- ------------ ------------ ------------ ------------
Income (loss) before income taxes.... (129) 1,541 270 (238) 1,444
Provision (benefit) for income
taxes.............................. (49) 586(N) -- 12(N) 549
-------- ------------ ------------ ------------ ------------
Net income (loss).................... (80) 955 270 (250) 895
Preferred stock dividends............ (309) 309(O) -- -- --
-------- ------------ ------------ ------------ ------------
Net income (loss) attributable to
common stock....................... $ (389) $ 1,264 $ 270 $ (250) $ 895
======== ============ ============ ============ ============
Net income (loss) per share(P)....... $ (0.10) $ 0.16
======== ============
Weighted average outstanding
shares(P).......................... 3,770 5,745
======== ============
</TABLE>
F-8
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

(A) Represents the historical Consolidated Statements of Operations data of the
Company, which includes the results of management services provided to 1st
Dental Care and Mid-South Dental Centers, effective May 1996, and Horizon
Dental Centers, effective August 1996.

(B) Represents the combined historical Statements of Operations data of the
affiliated dental practices acquired in the Completed Acquisitions for the
period from January 1, 1996 through the acquisition date, as appropriate.

(C) Offering and Interim Financing adjustments represent those adjustments
resulting from the Interim Financing and this offering that will affect
the historical statements of operations on a continuing basis. The Pro
Forma Consolidated Statements of Operations do not reflect the $3,752,000
extraordinary loss on retirement of the Senior Subordinated Notes, with no
income tax effect, or a $1,517,000 preferred stock dividend that will be
recognized in the period this offering is completed.

(D) Represents the historical statement of operations data of SW Dental for the
year ended December 31, 1996 and six months ended June 30, 1997.

(E) Represents (i) adjustments to historical compensation paid to the owner of
an acquired dental practice in excess of amounts due under the terms of an
employment agreement entered into in connection with the acquisition of
such dental practice, (ii) reclassification of amounts that would have
been retained by the affiliated dental practices pursuant to the terms of
the management services agreements and (iii) the elimination of a
management fee recognized in June 1997 between the Company and SW Dental:
<TABLE>
<CAPTION>
COMPLETED AUSTIN ACQUISITION
ACQUISITIONS ----------------------------------
----------------- SIX MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Reduction in owner's
compensation..................... $ 100 $-- $--
Reclassification of expenses....... 732 1,138 635
Elimination of management fee...... -- -- 16
------ -------- --------------
$ 832 $ 1,138 $ 651
====== ======== ==============
</TABLE>
(F) Represents the elimination of management fees paid to the owner of an
acquired dental practice that will not be incurred pursuant to the terms
of the acquisition agreement. See notes G, H, I and J for increased
expenses related to the management fees.

(G) Represents additional rents that will be incurred by the Company that were
formerly paid by the owner of an acquired dental practice. The increase
will be partially offset by a reduction in rents that were formerly paid to
the owner of another acquired dental practice prior to its acquisition by
the Company.

YEAR ENDED
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Reduction for excess rent
payments.......................... $ (39)
Additional rent expense to be
incurred by the Company........... 44
------
$ 5
======

(H) Represents increased expenses for advertising and marketing services that
were historically provided by the owner of an acquired dental practice
based on the owner's historical cost prior to its acquisition by the
Company.

F-9
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS
OF OPERATIONS -- (CONTINUED)

(I) Represents (i) an increase in amortization of management services
agreements associated with the Acquisition Transactions, and (ii)
adjustments to depreciation based upon the purchase price allocation to
property and equipment. The excess of cost over the fair value of the net
assets acquired will be assigned to management services agreements and
amortized over 25 years.

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Amortization of management services
agreements....................... $ 442 $ 130
Depreciation adjustment............ 76 10
------ --------------
$ 518 $ 140
====== ==============

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Completed Acquisitions............. $ 240 $ --
Austin Acquisition................. 278 140
------ --------------
Total......................... $ 518 $ 140
====== ==============

(J) Represents adjustments to compensation and other overhead expenses in
accordance with amounts due under the terms of employment and management
services agreements entered into in connection with the Acquisition
Transactions and the elimination of a management fee recognized in June
1997 between the Company and SW Dental.

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Adjust owners compensation of
acquired dental practices
pursuant to the terms of the
related employment agreements.... $ 289 $ 98
Adjust other costs, pursuant to the
terms of the acquisition
agreements....................... 17 --
Elimination of management fee...... -- (16)
------ --------------
$ 306 $ 82
====== ==============
Completed Acquisitions............. $ 91 $ --
Austin Acquisition................. 215 82
------ --------------
$ 306 $ 82
====== ==============

F-10
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS
OF OPERATIONS -- (CONTINUED)

(K) Represents adjustments to interest expense for additional debt issued in
connection with the Acquisition Transactions. The interest expense was
computed based upon actual interest rates on the Senior Subordinated Notes
and Seller Notes and the actual variable rate on the Bank Credit Facility
at the time the Company entered into the agreement. Such adjustments were
partially offset by a reduction in interest expense on debt either paid or
not assumed in connection with the Completed Acquisitions. The reduction
was based on actual interest expense recorded on the respective debt.
Interest on the various components was as follows:

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ 181 $ --
Senior Subordinated Notes (12%).... 240 112
Bank Credit Facility (8.75%)....... 251 --
Interest on acquisition debt paid
or not assumed................... (81) --
------ -------------
$ 591 $ 112
====== =============
Completed Acquisitions............. $ 351 $ --
Offering and interim financing
adjustments...................... 240 112
------ -------------
$ 591 $ 112
====== =============

(L) Represents the elimination of amortization associated with deferred
financing costs related to debt that will be repaid upon consummation of
this offering.

(M) Represents reductions to interest expense related to debt that will be
repaid from the net proceeds of this offering. The adjustments are based
upon actual amounts expensed or otherwise reflected in the pro forma
adjustments. Interest on the various components was as follows:

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
(IN THOUSANDS)
Seller Notes (6.34% - 10%)......... $ (412) $ (267)
Senior Subordinated Notes (12%).... (1,140) (604)
Bank Credit Facility (8.75%)....... (822) (441)
Amortization of Senior Subordinated
Note discount.................... (522) (313)
----------------- --------------
$(2,896) $ (1,625)
================= ==============

(N) Represents adjustments to accrue income taxes on pro forma net income based
on a tax rate of 34.1% for the year ended December 31, 1996 and 38% for the
six months ended June 30, 1997.

(O) Represents the reversal of preferred stock dividends on the Series A and
Series C preferred stock, which will be converted to the Company's common
stock in connection with the offering.

(P) Shares used in calculating net income per share include the weighted
average shares outstanding plus the number of shares, the proceeds of which
would be necessary to repay the portion of the Company's debt that funded
the $6.0 million payment to Jack H. Castle, D.D.S. in connection with the
Reorganization. Additionally they assume conversion of the Series A and
Series C stock to 948,243 shares of the Company's common stock and include
the number of shares to be issued in connection with the offering, the
proceeds of which will be used to retire a portion of the Bank Credit
Facility, the Senior Subordinated Notes and certain Seller Notes.

F-11

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Castle Dental Centers, Inc.:

We have audited the accompanying balance sheets of Castle Dental Centers,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholders' deficit, and cash flows for the year ended December 31,
1996 and the related statements of operations, changes in stockholders' equity
(deficit) and cash flows of its combined predecessor companies for each of the
two years in the period ended December 31, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Castle Dental Centers, Inc.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1996 and the results of operations and
cash flows of its combined predecessor companies for each of the two years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND
L.L.P.

Houston, Texas
June 19, 1997

F-12
<PAGE>
CASTLE DENTAL CENTERS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 6,439 $ 79
Patient receivables, net of
allowance for uncollectable
accounts of $2,437 and $2,425 in
1995 and 1996, respectively....... 2,710 3,649
Unbilled patient receivables, net
of allowance for uncollectible
accounts of $228 and $361 in 1995
and 1996, respectively............ 913 1,637
Prepaid expenses and other current
assets............................ 22 326
Deferred income taxes, net......... -- 284
--------- ---------
Total current assets.......... 10,084 5,975
--------- ---------
Property and equipment, net............. 1,583 3,882
Intangibles............................. -- 16,432
Other assets............................ 757 2,278
Deferred income taxes, net.............. 253 600
--------- ---------
Total assets.................. $ 12,677 $ 29,167
========= =========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit........... $ -- $ 1,200
Current portion of long-term
debt.............................. 900 2,371
Current portion of capital lease
obligations....................... 140 --
Accounts payable and accrued
liabilities....................... 2,310 3,849
Deferred compensation payable,
related party..................... 526 789
Due to affiliated dental
practices......................... -- 1,010
--------- ---------
Total current liabilities..... 3,876 9,219
--------- ---------
Long-term debt, net of current
portion............................... 5,099 13,616
Long-term debt, related party........... 4,363 5,335
Capital lease obligations, net of
current portion....................... 50 --
Other long-term liabilities, related
party................................. 2,104 1,578
Commitments and contingencies
Preferred stock, $.001 par value,
5,000,000 shares authorized; 1,244,737
shares Series A issued and
outstanding........................... 2,928 2,928
Stockholders' deficit:
Common stock, $.001 par value,
30,000,000 shares authorized,
2,000,000 and 2,331,996 shares
issued and outstanding,
respectively...................... 2 2
Additional paid-in capital......... 96 3,416
Accumulated deficit................ (5,841) (6,927)
--------- ---------
Total stockholders' deficit... (5,743) (3,509)
--------- ---------
Total liabilities and
stockholders' deficit...... $ 12,677 $ 29,167
========= =========

The accompanying notes are an integral part of the financial statements.

F-13
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

COMBINED PREDECESSOR
COMPANIES
--------------------
CONSOLIDATED
YEAR ENDED ------------
DECEMBER 31, YEAR ENDED
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- ------------
Patient revenues of affiliated dental
practices.......................... $ 17,083 $ 18,257 $ 29,601
Amounts retained by affiliated dental
practices.......................... -- -- 9,981
--------- --------- ------------
Net revenues.................... 17,083 18,257 19,620
--------- --------- ------------
Expenses:
Dentist salaries................ 2,853 3,345 --
Clinical salaries............... 1,811 1,879 4,233
Dental supplies and laboratory
fees.......................... 1,907 2,185 3,120
Rental and lease expense........ 681 836 1,592
Advertising and marketing....... 1,062 959 1,522
Depreciation and amortization... 309 336 1,088
Other operating expenses........ 2,205 2,260 2,913
General and administrative...... 3,172 3,825 3,700
Compensation to stockholders.... 2,147 5,284 592
--------- --------- ------------
Total expenses............. 16,147 20,909 18,760
--------- --------- ------------
Operating income (loss).... 936 (2,652) 860
Interest expense..................... 112 57 1,174
Interest expense, related party...... -- 30 1,422
Other income ........................ -- -- (89)
--------- --------- ------------
Income (loss) before income taxes.... 824 (2,739) (1,647)
Provision (benefit) for income
taxes.............................. 43 (325) (561)
--------- --------- ------------
Net income (loss).................... $ 781 $ (2,414) $ (1,086)
========= ========= ============
Net income (loss) per share.......... $ (0.35)
============
If all of the Company's operations
had been subject to income taxes,
net income (loss) would have been
as follows (unaudited):
Historical income (loss) before
income taxes.................. $ 824 $ (2,739)
Provision (benefit) for income
taxes......................... 309 (1,041)
--------- ---------
Net income (loss)............... $ 515 $ (1,698)
========= =========
Weighted average number of common and
common equivalent shares
outstanding........................ 3,136
============
If the shares necessary to fund the
distribution to the owner in
connection with the Reorganization
were outstanding for the entire
period, net income per share and
weighted average shares outstanding
would have been as follows:
Pro forma net income per
share......................... $ (0.30)
============
Weighted average number of
common and common equivalent
shares outstanding............ 3,598
============

The accompanying notes are an integral part of the financial statements.

F-14
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS STOCKHOLDERS'
----------------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
----------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994................ 2,000,000 $ 2 $ 3 $ 1,791 $ 1,796
Net income......................... -- -- -- 781 781
----------- ---------- ---------- ------------ -------------
Balance, December 31, 1994.............. 2,000,000 2 3 2,572 2,577
Issuance of common stock and
distribution in connection with
the Reorganization............... 500 -- 1 (6,000) (5,999)
Cancellation of common stock in
connection with the
Reorganization................... (500) -- (1) 1 --
Issuance of warrant................ -- -- 93 -- 93
Net loss........................... -- -- -- (2,414) (2,414)
----------- ---------- ---------- ------------ -------------
Balance, December 31, 1995.............. 2,000,000 2 96 (5,841) (5,743)
Issuance of common stock........... 331,996 -- 3,320 -- 3,320
Net loss........................... -- -- -- (1,086) (1,086)
----------- ---------- ---------- ------------ -------------
Balance, December 31, 1996.............. 2,331,996 $ 2 $3,416 $ (6,927) $(3,509)
=========== ========== ========== ============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-15
<PAGE>
CASTLE DENTAL CENTERS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

COMBINED PREDECESSOR
COMPANIES
--------------------
CONSOLIDATED
YEAR ENDED -------------
DECEMBER 31, YEAR ENDED
-------------------- DECEMBER 31,
1994 1995 1996
--------- --------- -------------
Cash flows from operating activities
Net income (loss)............... $ 781 $ (2,414) $(1,086)
Adjustments:
Provision for bad debts.... 1,501 1,399 1,227
Depreciation and
amortization............ 309 336 1,088
Gain on sale of property,
plant and equipment..... -- -- (16)
Amortization of debt
discount................ -- -- 522
Deferred income taxes
(benefit)............... 30 (325) (561)
Issuance of deferred
compensation
agreement............... -- 2,630 --
Changes in operating assets
and liabilities:
Patient receivables... (1,848) (1,285) (1,514)
Unbilled patient
receivables........ (286) (578) (748)
Prepaid expenses and
other current
assets............. 45 -- (206)
Other assets.......... (8) (13) (283)
Accounts payable and
accrued
liabilities........ 522 748 1,386
Due to affiliated
dental practices -- -- 860
Deferred compensation
payments to
shareholder........ -- -- (263)
--------- --------- -------------
Net cash
provided by
operating
activities.... 1,046 498 406
--------- --------- -------------
Cash flows used in investing
activities:
Capital expenditures............ (308) (441) (1,337)
Proceeds from sale of property,
plant and equipment........... -- -- 607
Acquisition of affiliated dental
practices, net of cash
acquired...................... -- -- (10,335)
Escrow deposit.................. -- -- (500)
--------- --------- -------------
Net cash used in investing
activities.............. (308) (441) (11,565)
--------- --------- -------------
Cash flows from financing activities:
Proceeds from debt.............. 67 10,362 7,250
Repayment of debt............... (817) (328) (1,543)
Issuance of redeemable preferred
stock......................... -- 3,138 --
Distribution to shareholder..... -- (6,000) --
Offering costs.................. -- -- (650)
Payment of debt and preferred
stock issuance costs.......... -- (812) (258)
--------- --------- -------------
Net cash provided by (used
in) financing
activities.............. (750) 6,360 4,799
--------- --------- -------------
Net change in cash and cash
equivalents........................ (12) 6,417 (6,360)
Cash and cash equivalents, beginning
of period.......................... 34 22 6,439
--------- --------- -------------
Cash and cash equivalents, end of
period............................. $ 22 $ 6,439 $ 79
========= ========= =============

The accompanying notes are an integral part of the financial statements.

F-16
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CORPORATE ORGANIZATION AND BASIS OF PRESENTATION

Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management services, non-healthcare personnel, facilities and
equipment to certain professional corporations in Texas, Florida and Tennessee
under long-term management services agreements. These professional corporations
are collectively referred to as the affiliated dental practices.

The Company has entered into a long-term management services agreement with
each of the affiliated dental practices, under which the Company provides
equipment, facilities, administrative personnel and management services, in
exchange for a contracted management fee based on a formula. Each of these
agreements is for an initial term of 25 to 40 years with successive automatic
five year renewal terms, unless terminated at least 90 days before the end of
the initial term or any renewal term.

Through the management services agreement, the Company generally assumes
full responsibility for the operating expenses, has the right to purchase and
has responsibility for collection of all accounts receivable, and receives a
management fee for providing non-dental services. The Company generally has
perpetual, unilateral control over the assets and operations of the affiliated
dental practices (except with respect to those relating to the practice of
dentistry and other matters requiring licensure).

The Company was formed in December 1995 and merged with Family Dental
Services of Texas, Inc. ("FDS"), a company wholly owned by members of the
family of and entities controlled by Jack H. Castle, D.D.S. (the "Castle
Family"). The Company's operations began on January 1, 1996. Simultaneously
with this transaction, the Company paid $6,000,000 to acquire all of the
outstanding stock of Jack H. Castle, D.D.S., Inc. ("JCD"), a professional
corporation of which Dr. Jack H. Castle was the sole owner. JCD provided dental
care to patients from 1949 through December 31, 1995. FDS had been established
in 1981 to carry out administrative functions for the professional corporation
and had no business other than providing administrative services to JCD. All of
FDS's revenues consisted of reimbursement of its costs incurred on behalf of
JCD. Effective with the acquisition, JCD ceased to operate as a separate entity,
and a new professional corporation, Jack H. Castle, D.D.S., P.C. ("PC") was
established to continue the dental practice previously operated by JCD.
Therefore, at December 31, 1995, the Company's financial statements included
both the operations and assets of FDS, the administrative and management
services company, and JCD, the professional corporation (together the
"predecessor companies"). The combined statements of operations, changes in
stockholders' equity (deficit) and cash flows for the years ended December 31,
1994 and 1995 reflect the combined operations of predecessor companies because
these entities' activities were assumed by the Company and the PC and they were
under common control. All of the services provided by FDS to JDC have been
eliminated in combination of the predecessor companies' financial statements
(see discussion below).

At December 31, 1995 and 1996, and for the year ended December 31, 1996,
the consolidated financial statements include Castle Dental Centers, Inc. and
its wholly-owned management company subsidiaries. The Company does not
consolidate the financial statements of the affiliated dental practices. For
disclosure purposes, the Company has presented the affiliated dental practice
revenues and amounts retained by the affiliated dental practices in the
accompanying consolidated statements of operations for the year ended December
31, 1996.

All intercompany accounts and transactions have been eliminated in
consolidation.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt investments with original
maturities of three months or less at the date of acquisition to be cash
equivalents. The carrying amounts approximate fair value.

F-17
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

Patient revenues from affiliated dental practices ("Patient Revenues")
represent the estimated realizable amounts to be received from patients,
third-party payors and others for services rendered by affiliated dentists.
Patient Revenues from general dentistry are recognized as the services are
performed. Patient Revenues from orthodontic services are recognized in
accordance with the proportional performance method. Under this method, revenue
is recognized as services are incurred under the terms of contractual agreements
with each patient. Approximately 25% of the services are performed in the first
month with the remaining services recognized ratably over the remainder of the
contract. Billings under each contract, which average approximately 28 months,
are made equally throughout the term of the contract, with final payment at the
completion of the treatment.

Amounts retained by affiliated dental practices consist primarily of
compensation paid to dental professionals, including dentists, orthodontists,
hygienists, and dental assistants.

Net revenues represent management fees earned by the Company in accordance
with management services agreements with the affiliated dental practices and are
generally equal to Patient Revenues less amounts retained by affiliated dental
practices.

The management services fee charged to affiliated dental practices is
comprised of three components: (1) the reimbursable expenses of the Company, (2)
a base management fee ranging from 12.5% to 15.0% of net patient revenues of the
affiliated dental practices and (3) a performance fee equal to the patient
revenues of the affiliated dental practice less (a) the expenses of the
professional corporation and (b) the reimbursable expenses and base management
fees comprised of (1) and (2) above, if any.

Accounts receivable consist primarily of receivables from patients,
insurers, government programs and contracts between the affiliated dental
practices and third-party payors for dental services provided by dentists. The
Company does not believe that change in the reimbursement arrangements for its
affiliated dental practice contracts with third-party payors would have a
material impact on management fee revenues. An allowance for doubtful accounts
is recorded by the Company based on historical experience.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the various classes
of depreciable assets, ranging from five to ten years. Fully depreciated assets
are retained in property and equipment until they are removed from service.
Fully depreciated assets in use as of December 31, 1995 and 1996 were $490,000
and $948,400, respectively. Maintenance and repairs are charged to expense
whereas renewals and major replacements are capitalized. Gains and losses from
dispositions are included in operations.

INTANGIBLE ASSETS

The Company's acquisitions involve the purchase of tangible and intangible
assets and the assumption of certain liabilities of the affiliated dental
practices. As part of the purchase allocation, the Company allocates the
purchase price to the tangible assets acquired and liabilities assumed, based on
estimated fair market values. In connection with each acquisition, the Company
enters into a long-term management services agreement with each affiliated
dental practice, which cannot be terminated by either party without cause. The
cost of the management services agreement is amortized on a straight line basis
over its term, or such shorter period as may be indicated by the facts and
circumstances, as described below. Amortization periods of the management
services agreements acquired through December 31, 1996, are 25 years.

In connection with the allocation of the purchase price to identifiable
intangible assets, the Company analyzes the nature of the group with which a
management services agreement is entered into, including the number of dentists
in each group, number of dental centers and ability to recruit additional
dentists, the affiliated dental practice's relative market position, the length
of time each affiliated dental practice has

F-18
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

been in existence, and the term and enforceability of the management services
agreement. Because the Company does not practice dentistry, maintain patient
relationships, hire dentists, enter into employment and noncompete agreements
with the dentist, or directly contract with payors, the intangible asset created
in the purchase allocation process is associated solely with the management
services agreement with the affiliated dental practice.

The Emerging Issues Task Force of the Financial Accounting Standards Board
is currently evaluating certain matters relating to the physician practice
management industry, which the Company expects will include a review of
accounting for affiliated dental practices. The Company is unable to predict the
impact, if any, that this review may have on the Company's acquisition strategy,
allocation of purchase price related to acquisitions, and amortization life
assigned to intangible assets.

At each balance sheet date the Company reviews intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. If this review indicates that the carrying
amount of the asset may not be recoverable, as determined based on the
undiscounted cash flows of the operations acquired over the remaining
amortization period, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each affiliated dental practice's relative market share and local
market competitive environment, current period and forecasted operating results
and cash flows of the affiliated dental practice and its impact on the
management fee earned by the Company, and legal factors governing the practice
of dentistry.

OTHER ASSETS

At December 31, 1996, other assets consist primarily of debt issuance costs
and capitalized offering costs. The costs related to the issuance of debt are
capitalized and amortized using the effective interest method over the lives of
the related debt.

The Company has capitalized all costs associated with an initial public
offering. Upon completion of the offering, such costs will be netted against the
proceeds. In the event the offering is not successful, the Company will expense
these costs.

DUE TO AFFILIATED DENTAL PRACTICES

Amounts due to affiliated dental practices represent transfers of patient
receivables to the Company in excess of management fees earned.

INCOME TAXES

Prior to January 1, 1996, JCD was a subchapter S entity and, accordingly,
all federal tax liabilities were the responsibility of the shareholder. The
subchapter S election of JCD was automatically terminated when the entity became
a wholly-owned subsidiary of the Company; and therefore, became a C-Corporation
for federal income tax purposes. Accordingly, a pro forma provision for income
taxes is presented as if the entities were taxed as C-Corporations during the
years ended December 31, 1994 and 1995.

Income taxes, including pro forma calculations, are accounted for under the
liability method. Under this method, deferred taxes are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted marginal tax rates currently in
effect. All federal deferred taxes of JCD were recognized upon becoming a
C-Corporation.

EARNINGS PER SHARE

In June 1997, the Company's Board of Directors declared and the
stockholders approved a 1-for-2 reverse split of the Company's common stock. All
share and per share information in the accompanying financial statements has
been retroactively restated to reflect the effects of the reverse stock split.

F-19
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Earnings per share is computed on the basis of the weighted average number
of shares of common stock and common stock equivalents outstanding during each
period. Shares outstanding for all periods presented have been retroactively
adjusted to reflect the Reorganization discussed in Note 2 and the issuance of
common stock upon the contemplated conversion of the Series A and Series C Stock
in connection with the planned initial public offering (Notes 6 and 14).
Additionally, in accordance with SAB Number 55, pro forma earnings per share
have been presented for 1996 to reflect issuance of the number of shares that
would have been necessary to fund the $6,000,000 distribution to the Company's
owner in connection with the Reorganization (at the initial public offering
price of $13.00 per share). Fully diluted earnings per share are not presented
because such amounts would be the same as amounts computed for primary earnings
per share.

ADVERTISING

Costs incurred for advertising are expensed when incurred.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during the
reporting periods. Actual results could differ from those estimates.

RECENTLY ISSUED PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("SFAS 129"). These
statements will be adopted by the Company effective January 31, 1998. SFAS 128
simplifies the computation of earnings per share by replacing primary and fully
diluted presentations with the new basic and diluted disclosures. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. The Company has not determined the impact of these pronouncements on
its financial statements.

2. REORGANIZATION AND RELATED TRANSACTIONS:

In December 1995, the Company completed a reorganization (the
"Reorganization") by (i) entering into a credit agreement that included a
$3,000,000 revolving line of credit and a $6,000,000 bank term loan (the "Bank
Credit Facility"), (ii) issuing $7,500,000 face amount of senior subordinated
notes (the "Senior Subordinated Notes") together with 1,244,737 shares of
Series A Convertible Preferred Stock (the "Series A Stock") (Note 6) and (iii)
issuing 2,000,000 shares of common stock to the former owner of JCD and certain
related parties. A portion of the proceeds from the Reorganization was used to
acquire JCD, which acquisition was recorded as a capital distribution to JCD's
shareholder because the Company and JCD were under common control. The Company
has retroactively applied these common shares to all historical financial
statements as a stock split.

In connection with the purchase of the stock of JCD, the Company entered
into a deferred compensation agreement (the "Deferred Compensation Agreement")
with the sole shareholder of JCD, who is also director of the Company, pursuant
to which the Company has agreed to pay the shareholder $2,630,000 in 20
quarterly installments beginning March 1996. The Company accrued the entire
liability under the agreement in December 1995 through a charge to compensation
to shareholders. The Company was two payments in arrears at December 31, 1996
(Note 5). In June 1997, the shareholder and the Company amended the Deferred
Compensation Agreement to postpone the payment of any scheduled payments until
the earlier of December 31, 2000, or of a qualified equity or debt financing, as
described in the amended

F-20
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

agreement, of which the proceeds are applied to the Bank Credit Facility and the
$2.0 million Senior Subordinated Notes issued in June 1997 ("Notes"), or the
closing of any equity offering of which the proceeds are applied to the Bank
Credit Facility and those Senior Subordinated Notes and (b) January 31, 1998, at
which time the scheduled deferred compensation payments shall become payable
beginning on the next scheduled payment date, and (ii) deferring payment of the
scheduled payments under the Deferred Compensation Agreement which were not made
from September 30, 1996 until the earlier of (a) the closing or December 31,
2000. Amounts not paid when scheduled under the original Deferred Compensation
Agreement bear interest at the rate of ten percent per year.

A warrant to purchase 56,579 shares of common stock at an exercise price of
$11.00 per share was issued to an investment advisor in connection with the
Reorganization (Note 13). The warrant is exercisable at any time prior to its
expiration date of December 18, 2000. The value of the warrant ($1.64 per share)
has been recorded as deferred offering costs of the Senior Subordinated Notes.

3. SELECTED BALANCE SHEET INFORMATION:

The details of certain balance sheet accounts were as follows:

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Property and equipment:
Equipment.......................... $ 1,616 $ 3,841
Leasehold improvements............. 632 1,825
Furniture and fixtures............. 520 610
Vehicles........................... 17 75
Equipment under capital leases..... 602 --
--------- ---------
Total property and
equipment.................. 3,387 6,351
Less accumulated depreciation and
amortization..................... 1,804 2,469
--------- ---------
Property and equipment, net... $ 1,583 $ 3,882
========= =========

Depreciation expense was approximately $309,000, $336,000 and $678,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.

Intangible assets:
Management services
agreements.................... $ -- $ 16,513
Other........................... -- 150
--------- ---------
Total intangible assets.... -- 16,663
Less accumulated amortization... -- 231
--------- ---------
Intangible assets,
net................ $ -- $ 16,432
========= =========
Accounts payable and accrued
liabilities:
Trade........................... $ 1,645 $ 2,458
Salaries, wages and payroll
taxes......................... 49 596
Other........................... 616 795
--------- ---------
$ 2,310 $ 3,849
========= =========

F-21
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. ACQUISITIONS:

In May 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of 1st Dental Care and Mid-South Dental Centers,
group dental practices headquartered in Clearwater, Florida, and Nashville,
Tennessee, respectively. In August 1996, the Company acquired substantially all
of the assets and assumed certain liabilities of five dental practices and
acquired the stock of three dental practices operated by Horizon Dental Centers,
a group dental practice with offices in Austin and Ft. Worth, Texas.

The aggregate purchase price, including the payment of certain assumed debt
and related acquisition expenses, of $18.2 million consisted of $10.3 million in
cash, $4.6 million in seller notes payable (Note 5) and 332,000 shares of
Company common stock with a fair market value of $3.3 million. In connection
with these acquisitions, the Company entered into employment agreements with
certain employees and former owners of the businesses acquired and into
long-term management services agreements with each of the affiliated dental
practices.

The assets and liabilities have been recorded at their estimated fair
values at the date of acquisition. The aggregate purchase price and related
expenses exceeded the fair market value of net assets by approximately $16.5
million, which has been assigned to management services agreements, included in
intangible assets. Patient Revenues, management fees and related costs are
included in the consolidated financial statements from their acquisition dates.

The estimated fair value of assets acquired and liabilities assumed are
summarized as follows:

Patient receivables, net............. $ 562
Unbilled patient receivables, net.... 66
Prepaid expenses and other current
assets............................... 99
Property and equipment............... 2,104
Other assets......................... 10
Management services agreements....... 16,663
Accounts payable and accrued
liabilities.......................... (603)
Long-term debt, assumed.............. (535)
Other liabilities.................... (80)
---------
18,286
Less: fair value of common stock
issued and to be issued............ 3,320
Less: issuance of notes payable...... 4,631
---------
Cash purchase price, net of cash
acquired........................ $ 10,335
=========

At December 31, 1996 other current assets include a purchase price
adjustment of approximately $136,000 due from a former shareholder of an
acquired dental practice. The former shareholder is a regional director of the
Company.

Unaudited pro forma combined results of operations, assuming all of the
acquisitions occurred at January 1, 1995, are as follows:

YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Net revenues......................... $ 25,405 $ 27,006
Net income (loss).................... (2,280) (968)
Net income (loss) per share.......... $ (0.70) $ (0.30)

F-22
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The unaudited pro forma summary is not necessarily indicative either of
results of operations, that would have occurred had the acquisitions been made
at the beginning of the periods presented, or of future results of operations of
the combined companies.

In September 1996, the Company entered into a letter of intent and paid a
$500,000 nonrefundable deposit to acquire substantially all of the assets and
assume certain liabilities of SW Dental Associates, LC ("SW Dental"), a group
dental practice located in Austin, Texas. The deposit will be applied against
the purchase price of $6.4 million which will consist of cash and shares of the
Company's Series B Convertible Preferred Stock (Note 6). In June 1997, the
Company entered into management services and option agreements with SW Dental
and paid an additional $1.0 million nonrefundable deposit as partial
consideration for the acquisition. In the event the acquisition is not
consummated by May 31, 1998, the Company will forfeit the $1.5 million paid as
partial consideration and the owners of SW Dental will have the option for 60
days thereafter to purchase the Company's operations and facilities in the
Austin, Texas area for $3.4 million.

5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:

In June 1997, the Company and the bank amended and restated the Bank Credit
Facility (the "1997 Amendment"). At December 31, 1996, the Company classified
the current and long-term portion of debt outstanding under the Bank Credit
Facility in accordance with the 1997 Amendment. The following discussion
reflects those terms. The Bank Credit Facility is collateralized by
substantially all of the Company's assets and is personally guaranteed by a
member of the Castle family.

REVOLVING LINE OF CREDIT

Under the terms of the Bank Credit Facility, the Company maintains a $3.0
million revolving line of credit that is used for working capital requirements
and acquisitions. During 1996, interest on the revolving line of credit was
computed at variable rates based upon either the bank's base rate or LIBOR plus
an applicable margin. The Company's borrowing rate under the Bank Credit
Facility at December 31, 1996 was 8.75 percent. A commitment fee is payable
quarterly at rates ranging from 0.25 percent to 0.5 percent of the unused
amounts for such quarter. At December 31, 1996, $1.2 million was outstanding
under the revolving line of credit. In June 1997, the interest rate under the
revolving line of credit was amended to the bank's base rate plus 1.0 percent.
The revolving line of credit expires on January 31, 1998. The bank's base rate
at May 31, 1997 was 8.50 percent.

F-23
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

LONG-TERM DEBT

Long-term debt consisted of the following:

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Term loan............................ $ 6,000 $ 10,847
Senior Subordinated Notes............ 7,500 7,950
Seller Notes......................... -- 4,444
Other various notes payable.......... -- 696
--------- ---------
Total debt...................... 13,500 23,937
Less discount on Senior Subordinated
Notes................................ 3,138 2,615
--------- ---------
Long-term debt, net of discount...... 10,362 21,322
Less current portion................. 900 2,371
--------- ---------
Long-term debt.................. $ 9,462 $ 18,951
========= =========
Long-term debt, net of current
portion............................ $ 5,099 $ 13,616
Long-term debt, related party........ 4,363 5,335
--------- ---------
$ 9,462 $ 18,951
========= =========

Under the terms of the 1997 Amendment, the aggregate commitment under the
term loan was reduced to $10.8 million, the amount outstanding as of the
amendment date. Principal payments of $602,500 are due on September 30 and
December 31, 1997 with a final maturity date of January 31, 1998. Interest at
the bank's base rate plus 1.5 percent is payable quarterly. The Company's
weighted average borrowing rate at December 31, 1996 was 9.16 percent and was
computed during the year based upon the same rate as the revolving line of
credit.

The Senior Subordinated Notes bear interest at 12 percent, payable
quarterly in arrears with principal payable in two installments of $3.75 million
each on December 18, 2001 and 2002. The Company is required to repurchase all
outstanding Senior Subordinated Notes in the event of a change in control or if
no secondary market exists at December 18, 2001. The holders of the Senior
Subordinated Notes have agreed to accept interest notes in lieu of interest
payments if the Company does not maintain certain financial covenant ratios
under the Bank Credit Facility. As of December 31, 1996, the Company had issued
$450,000 in interest notes in lieu of quarterly interest payments. Through May
31, 1997, the Company had issued an additional $225,000 in interest notes and
expects to issue an additional $225,000 interest note in June 1997. The Senior
Subordinated Notes are not collateralized and are subordinated to the Bank
Credit Facility. The discount on the Senior Subordinated Notes is being
amortized using the interest method through their maturities. The effective
interest rate of the Senior Subordinated Notes was 24.1% as of December 31,
1996.

The Bank Credit Facility and the Senior Subordinated Notes contain
affirmative and negative covenants that require the Company to maintain certain
financial ratios, limit the amount of additional indebtedness, limit the
creation or existence of liens and set certain restrictions on acquisitions,
mergers and sales of assets. At December 31, 1996, the Company was not in
compliance with certain covenants of the

F-24
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Bank Credit Facility and of the Senior Subordinated Notes. In connection with
the June 1997 amendment, both lenders waived any events of default that had
occurred through the date of the amendments.

At December 31, 1996, approximately $776,000 (net of accumulated
amortization of $179,000) of debt issuance costs, had been capitalized in
connection with the issuance of the Bank Credit Facility and the Subordinated
Notes. Additionally, approximately $210,000 of issuance costs were charged to
the Series A Stock.

The Company has issued various subordinated promissory notes payable in
connection with certain acquisitions ("Seller Notes") (Note 4). During 1996
interest on the Seller Notes ranged from 6.36 percent to 10.0 percent. At
December 31, 1996, the Company was in arrears on payments due under certain
Seller Notes. In April and June 1997, the Company restructured each of the
Seller Notes to provide for interest payments through January 1998, at interest
rates of 10 percent per annum. Principal is due in equal installments beginning
January 1998 through various dates in 2001. All of the defaults under each of
the Seller Notes have been waived and the Company is in compliance with the
Seller Notes, as restructured. The Seller Notes are not collateralized. The
Seller Notes are subordinated to the Bank Credit Facility and the Senior
Subordinated Notes.

In connection with restructuring the Seller Notes, the Company granted an
option to the former owner of its Florida facilities to acquire its operations
in Florida for an aggregate consideration of $3.1 million in cash, the discharge
of $2.7 million Seller Notes and the return of the 72,621 shares of the
Company's common stock that had been issued in connection with the Company's
acquisition of the Florida facilities. The option may only be exercised if the
Company defaults on scheduled payments under the related restructured Seller
Notes or if the Company's lender under the Bank Credit Facility declares a
default under the Bank Credit Facility and accelerates amounts due thereunder.
Also, in connection with restructuring of the Seller Notes, the Company modified
certain other contractual relationships between the Company and the former owner
of the Florida facilities and entered into a limited mutual release with respect
to claims arising out of the Company's default under the original terms of the
related Seller Notes. An aggregate of $943,000 of these Seller Notes remains
convertible into common stock prior to the time they are paid at a conversion
price of $14.34 per share, subject to antidilution adjustments and automatic
annual increases in conversion price.

The aggregate maturities of long-term debt for each of the next five years
subsequent to December 31, 1996 were as follows (in thousands):

1997................................. $ 2,371
1998................................. 4,531
1999................................. 3,226
2000................................. 4,125
2001................................. 5,660
Thereafter........................... 4,024
---------
$ 23,937
=========

6. PREFERRED STOCK:

SERIES A CONVERTIBLE PREFERRED STOCK

As of December 31, 1996, there were 1,244,737 shares of the Series A
Convertible Preferred Stock (the "Series A Stock") outstanding. The Series A
Stock was convertible into 663,960 shares of the Company's common stock. The
conversion ratio increases proportionately when the Company issues interest
notes in lieu of interest payments to the holders of the Senior Subordinated
Notes. Consequently, after the expected issuance of interest notes in June 1997
(Note 5) the Series A Stock will be convertible

F-25
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

into 705,552 shares of common stock. The Series A Stock is mandatorily
redeemable at the fair market value of the underlying common stock at the date
of redemption at the holder's option either upon receipt of a change of control
notice or after December 18, 2001, if no secondary market exists for Series A
Stock. The fair market value of the Series A Stock issued ($2.52 per share) has
been recorded as a discount on the Senior Subordinated Notes. The valuation of
the Series A Stock considered the Company's condition at the issuance date, the
terms of the 1995 reorganization, the risk associated with the successful
implementation of its business plan and valuation of comparable private
companies. The Company evaluates the redemption value of the Series A Stock at
each balance sheet date and accretes the portion of the difference between the
recorded value at that date and the redemption value over the remaining period
to the earliest redemption date, December 18, 2001. The accretion for each
period is charged to Series A Stock dividends. The Company has a right to call
all the shares of the Series A Stock at $.001 per share, upon a qualifying
public offering of the Company's common stock.

SERIES B CONVERTIBLE PREFERRED STOCK

The Company has agreed to issue Series B Convertible Preferred Stock (the
"Series B Stock") in connection with the planned acquisition of SW Dental
(Note 4). The number of shares to be issued will be those equivalent to
$1,550,000 divided by the price of the Company's common stock in its planned
initial public offering, which will close contemporaneously with the acquisition
of SW Dental. The Series B Stock will be convertible at the holder's option, for
a thirty-day period beginning one year after its issuance (the "Conversion
Period"), into an equivalent number of shares of the Company's common stock.
Alternatively, during the Conversion Period, the holder may require the Company
to redeem the Series B Stock in quarterly increments of $114,000. The Company
may call the Series B Stock at any time following the Conversion Period.

SERIES C CONVERTIBLE PREFERRED STOCK

In June 1997, the Company issued 485,382 shares of its Series C Convertible
Preferred Stock (the "Series C Stock") in connection with issuance of $2
million in Senior Subordinated Notes (Note 5). The terms of the Series C Stock
are substantially the same as those of the Series A Stock. The Series C Stock is
convertible into 242,691 shares of the Company's common stock.

7. COMMITMENT AND CONTINGENCIES:

LEASE COMMITMENTS

Future minimum lease payments under non-cancellable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1996 (in thousands):

1997.................................... $ 1,687
1998.................................... 1,377
1999.................................... 1,203
2000.................................... 928
2001.................................... 574
Thereafter.............................. 1,358
---------
Total minimum lease obligation.......... $ 7,127
=========

The Company has entered into operating leases for various types of office
equipment and for its building facilities. Certain building facility leases
include rent escalation clauses. Most leases contain purchase and renewal
options at fair market and rental values.

F-26
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

LITIGATION

The Company is from time to time subject to claims and suits arising in the
ordinary course of operations. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.

DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY

Each Affiliated Dental Practice has entered into an employment agreement
with each full time dentist, orthodontist and other dental specialist it
employs. Although the form of contract varies somewhat among practices and among
dentists with different specialties, the typical contract provides for a defined
compensation arrangement, including performance-based compensation, liquidated
damages and a covenant not to compete. Each full-time dentist is required to
maintain professional liability insurance, and mandated coverage limits are
generally at least $1,000,000 per claim and $1,000,000 in aggregate. In
addition, many affiliated dental practices employ part-time dentists. Not all
part-time dentists have employment agreements, but all part-time dentists are
required to carry professional liability insurance in specified amounts.

8. INCOME TAXES:

Significant components of the Company's deferred tax assets (liabilities)
were as follows:

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforward.... $ -- $ 758
Deferred compensation.............. 999 982
Allowances for bad debts........... 926 922
Accrued amounts not currently
deductible....................... -- 149
--------- ---------
Total deferred assets......... 1,925 2,811
--------- ---------
Deferred tax liabilities:
Unbilled receivables............... (347) (622)
Loss of Subchapter S status in
connection with changes in
corporate form................... (1,307) (1,059)
Other.............................. -- (16)
Management services agreements..... -- (122)
Property and equipment............. -- (108)
--------- ---------
Total deferred tax
liabilities................ (1,654) (1,927)
--------- ---------
Net deferred tax assets................. 271 884
Less current portion.................... 18 284
--------- ---------
Noncurrent......................... $ 253 $ 600
========= =========

F-27
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the provision for income taxes were as follows:

DECEMBER 31,
---------------------------------
1994 1995 1996
----------- --------- ---------
Current tax provision:
Federal............................ $ 13 $ -- $ --
State.............................. -- -- --
----------- --------- ---------
Total current................. 13 -- --
----------- --------- ---------
Deferred tax provision (benefit):
Federal............................ $ -- $ (217) $ (512)
State.............................. 30 (108) (49)
--------- --------- ---------
Total deferred................ 30 (325) (561)
--------- --------- ---------
Provision (benefit) for income taxes.... $ 43 $ (325) $ (561)
========= ========= =========

The differences between the statutory federal tax rate and the Company's
effective tax rate were as follows:

DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)........ $ 280 $ (931) $ (560)
State income taxes, net of federal
tax................................... 30 (71) (66)
Income not subject to corporate level
federal tax........................... (266) (83) --
Difference due to graduated tax rates... (10) -- --
Nondeductible expenses and other........ 9 10 65
Effect of conversion to taxable
entity................................ -- 750 --
--------- --------- ---------
$ 43 $ (325) $ (561)
========= ========= =========

At December 31, 1996, the Company had net operating loss carryforwards
available to reduce future taxable income of approximately $2 million, expiring
in 2011. The Company has not recorded a valuation allowance for the potential
inability to realize its net deferred tax assets because, after consideration of
the affiliated dental practices' historical operating results and the Company's
planned operations, management believes that it is more likely than not that the
Company will realize those assets.

9. STOCK OPTION PLANS

The Company has adopted the Castle Dental Centers, Inc. Omnibus Stock and
Incentive Plan (the "Employees Plan"), a stock-based incentive compensation
plan, and the Nonemployee Directors Stock Option Plan (the "Directors' Plan,"
together, the "Plans"), which are described below. The Company applies APB
Opinion 25 and related Interpretations in accounting for the Plans. In 1995, the
FASB issued Statement of Financial Accounting Standards Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost of the Plans. Adoption of the cost recognition provisions
of SFAS 123 is optional and the Company has decided not to elect these
provisions of SFAS 123. However, pro forma disclosures as if the Company adopted
the cost recognition provisions of SFAS 123 in 1995 are required by SFAS 123 and
are presented below.

Under the Employees' Plan, the Company is authorized to issue 750,000
shares of Common Stock pursuant to awards granted to officers and key employees
in the form of stock options and restricted stock. Under the Directors' Plan,
the Company is authorized to issue 150,000 shares of Common Stock to non-

F-28
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

employee directors of the Company. There were no options granted under the
Directors' Plan at December 31, 1996. The Compensation Committee administers the
Plans.

The stock options granted in 1996 have exercise prices of $10.00 and $11.00
per share, which in each case was greater than or equal to the fair market value
of the Common Stock on the date of grant. These options have contractual terms
of 10 years, and vest 20 percent per year over a five-year period, beginning on
the first anniversary of the date of grant. All of the options granted in 1996
are incentive stock options.

A summary of the status of the Company's stock options as of December 31,
1996 and the changes during the year ended on that date is presented below:

1996
--------------------------------------
NUMBER OF
SHARES OF WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICES
------------------ ----------------
Outstanding at beginning of year....... -- n/a
Granted at-a-premium.............. 28,000 $11.00
Granted at-the-money.............. 64,250 $10.00
------------------
Total granted.......................... 92,250 $10.30
==================
Outstanding at end of year............. 92,250 $10.30
==================

The weighted average fair value of options granted during the year at a
premium was $2.44, for options granted at-the-money was $3.02, and for all
options was $2.86.

The fair value of each new stock option granted in 1996 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: no dividend yield risk-free interest rates range
from 5.37 percent to 6.67 percent; and the expected lives of the options are six
years (SFAS 123 does not require the volatility of the Company's common stock
underlying the options to be calculated or considered because the Company was
not publicly-traded when the options were granted).

As of December 31, 1996, 92,250 options are outstanding, with a
weighted-average exercise price of $10.30 and a weighted average contractual
life of 9.35 years. None of the options were exercisable at December 31, 1996.

The Company has calculated the pro forma effects of adopting the
measurement principles of SFAS 123 and determined that the differences from
reported results are immaterial.

10. DEFINED CONTRIBUTION PLANS:

In August 1996, the Company adopted a defined contribution plan qualified
under Section 401(k) of the Internal Revenue Code of 1986 (the "401(k) Plan").
All permanent employees of the Company, except those of the Tennessee
subsidiary, are eligible to participate in the 401(k) Plan upon the completion
of six months of service. The Company maintains a separate defined contribution
401(k) plan for all permanent employees of the Company's Tennessee subsidiary
("Tennessee 401(k) Plan"). Employees are eligible to participate in the
Tennessee 401(k) Plan upon the completion of four months of service. The Company
may match contributions made by participants under both Plans each year in an
amount determined by the Company on a year-to-year basis.

The Company did not make any contributions to either Plan in 1996.

F-29
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. SUPPLEMENTAL CASH FLOW INFORMATION:

DECEMBER 31,
-----------------------------
1994 1995 1996
--------- ---- ---------
(IN THOUSANDS)
Cash paid during the period for:
Interest........................ $ 150 $87 $ 1,358
Income taxes.................... 14 1 --
Supplemental disclosure of noncash
investing and financing activities:
Effect of reorganization on
capital structure............... -- 39 --
Issuance of warrant............. -- 93 --
Issuance of notes payable for
accrued interest and purchase
of property and equipment..... -- -- 576

12. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

CREDIT RISK

The Company grants customers credit in the normal course of business. The
Company does not require collateral on the extension of credit. Procedures are
in effect to monitor the creditworthiness of customers and appropriate
allowances are made to reduce accounts to their net realizable values.

The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits. The Company has not experienced any
losses in such accounts.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and the revolving line of credit approximate fair values due to
the short-term maturities of these instruments. The carrying amounts of the
Company's long-term borrowings as of December 31, 1995 and 1996, respectively,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.

The carrying amounts of the Company's Series A Stock and warrants
approximate their fair value based on the Company's financial condition at
December 31, 1996.

13. RELATED PARTY TRANSACTIONS:

The Company maintains a management services agreement with the PC pursuant
to which the PC's shareholder receives an annual salary of $100,000 to take
actions necessary to maintain the dental license for the affiliated dental
practice in the state of Texas, for as long as he holds such license and is the
sole shareholder of the practice. Such compensation arrangement was negotiated
between the shareholder and previously unaffiliated investors in the Company. In
addition, the shareholder receives $131,500 per quarter pursuant to the terms of
the Deferred Compensation Agreement (Note 2).

During 1995, the Company entered into a lease agreement with Goforth, Inc.,
a company owned by the Company's chairman and chief executive officer (the
"Affiliate"). The Company has agreed to pay the Affiliate a minimum guaranteed
rental of $12,000 per month through January 2001 and $13,200 per month from
January 2001 through January 2006 for rental of a dental center. The Company has
also agreed to pay

F-30
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

additional rent of approximately $1,600 per month for insurance, taxes and
common area maintenance. The Company paid $188,400 and $235,000 under this
agreement during 1996 and 1995, respectively.

A Director of the Company is a Managing Director of The GulfStar Group,
Inc., which provides investment banking and advisory services to the Company.
The Company paid $540,000 and $198,000 during 1995 and 1996, respectively, in
investment banking fees to The GulfStar Group, and in 1995 issued a warrant for
56,579 shares of Common Stock to GulfStar Investments, Ltd., an affiliate of The
GulfStar Group, Inc. (Note 2).

A Director of the Company is a Managing Director of Pecks Management
Partners Ltd., an investment advisor to investors in the Company owning in the
aggregate 1,244,737 shares of the Series A Stock and $7.5 million of the
Subordinated Notes at December 31, 1996 (Note 2). Pursuant to the provisions of
a Securities Purchase Agreement dated as of December 18, 1995, as amended in
June 1997, for so long as certain ownership thresholds are maintained with
respect to Series A Stock and Series C Stock or common stock following
conversion of the Series A Stock and Series C Stock, the investors have the
contractual right to nominate one member of the Company's Board of Directors.

14. PLANNED INITIAL PUBLIC OFFERING

The Company has prepared a registration statement on SEC Form S-1 to
register 2.5 million of its common shares.

F-31

<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
(DOLLARS IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents....... $ 79 $ 1,488
Patient receivables, net........ 3,649 3,905
Unbilled patient receivables,
net............................ 1,637 1,950
Prepaid expenses and other
current assets................. 326 174
Deferred income taxes, net...... 284 284
------------- -----------
Total current assets....... 5,975 7,801
Property and equipment, net.......... 3,882 4,155
Intangible assets, net............... 16,432 16,096
Other assets......................... 2,278 3,466
Deferred income taxes, net........... 600 649
------------- -----------
Total assets............... $29,167 $32,167
============= ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving line of credit........ $ 1,200 $ 1,270
Current portion of long-term
debt and capital lease
obligations.................... 2,371 11,881
Current portion of long-term
debt, related party............ -- 856
Accounts payable and accrued
liabilities.................... 3,849 4,150
Deferred compensation payable,
related party.................. 789 789
Due to affiliated dental
practices...................... 1,010 833
------------- -----------
Total current
liabilities............. 9,219 19,779
Long-term debt and capital lease
obligations, net of current
portion............................ 13,616 4,229
Long-term debt related party, net of
current portion.................... 5,335 6,098
Commitments and contingencies
Other long-term liabilities, related
party.............................. 1,578 1,578
Preferred stock, $.001 par value,
5,000,000 shares authorized;
1,244,737 shares Series A and
485,382 shares Series C issued and
outstanding........................ 2,928 4,381
Stockholders' deficit:
Common stock, $.001 par value,
30,000,000 shares authorized,
and 2,331,996 shares issued and
outstanding.................... 2 2
Additional paid in capital...... 3,416 3,107
Accumulated deficit............. (6,927) (7,007)
------------- -----------
Total stockholders'
deficit................. (3,509) (3,898)
------------- -----------
Total liabilities and
stockholders' deficit... $29,167 $32,167
============= ===========

The accompanying notes are an integral part of the condensed consolidated
financial statements.

F-32
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Patient revenues of affiliated dental
practices.......................... $ 10,707 $ 21,327
Amounts retained by affiliated dental
practices.......................... 3,386 6,954
---------- ----------
Net revenues.................... 7,321 14,373
---------- ----------
Expenses:
Clinical salaries............... 1,359 2,781
Dental supplies and laboratory
fees........................... 1,351 1,967
Rental and lease expense........ 490 1,258
Advertising and marketing....... 533 1,031
Depreciation and amortization... 334 963
Other operating expenses........ 1,045 1,784
General and administrative...... 1,200 3,047
---------- ----------
Total expenses............. 6,312 12,831
---------- ----------
Operating income........... 1,009 1,542
Interest expense..................... 354 878
Interest expense, related party...... 711 805
Other income ........................ (106) (12)
---------- ----------
Income (loss) before income taxes.... 50 (129)
Provision (benefit) for income
taxes.............................. 19 (49)
---------- ----------
Net income (loss).......... 31 (80)
Preferred stock dividends............ -- (309)
---------- ----------
Net income (loss) attributable to
common stock....................... $ 31 $ (389)
========== ==========
Net income (loss) per share.......... $ 0.01 $ (0.12)
========== ==========
Weighted average number of common and
common equivalent shares
outstanding........................ 3,020 3,308
========== ==========
If the shares necessary to fund a
distribution to the owner in
connection with the Reorganization
were outstanding for the period,
net income per share and weighted
average shares outstanding would
have been as follows:
Pro forma net income per
share.......................... $ (0.10)
==========
Weighted average number of
common and common equivalent
shares outstanding............. 3,770
==========

The accompanying notes are an integral part of the condensed consolidated
financial statements.

F-33
<PAGE>
CASTLE DENTAL CENTERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
Net cash (used in) provided by
operating activities............... $ (367) $ 1,076
Investing activities:
Capital expenditures............ (194) (443)
Acquisition of affiliated
practices, net of cash
acquired....................... (7,616) --
Escrow deposit.................. -- (1,000)
--------- ---------
Net cash used by investing
activities......................... (7,810) (1,443)
--------- ---------
Financing activities:
Payments on long-term debt and
capital lease obligations...... (117) (148)
Proceeds from debt, related
party.......................... -- 2,000
Proceeds from debt.............. 3,950 70
Offering costs.................. -- (146)
--------- ---------
Net cash provided by financing
activities......................... 3,833 1,776
--------- ---------
Net change in cash and cash
equivalents............. (4,344) 1,409
Cash and cash equivalents, beginning
of period.......................... 6,439 79
--------- ---------
Cash and cash equivalents, end of
period............................. $ 2,095 $ 1,488
========= =========
Supplemental Cash Flow Information:
Supplemental disclosure of
noncash investing and financing
activities
Issuance of capital lease
obligation for purchase
of property and
equipment............... $ -- $ 357
Issuance of preferred stock
in connection with
related
party financing......... -- 1,144

The accompanying notes are an integral part of the condensed consolidated
financial statements.

F-34
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION:

Castle Dental Centers, Inc. and subsidiaries (the "Company") provide
administrative and management systems and services, non-healthcare personnel,
facilities and equipment to certain professional corporations in Texas, Florida
and Tennessee under long-term management services agreements. These professional
corporations are collectively referred to as the affiliated dental practices.

The accompanying condensed consolidated financial statements as of June 30,
1997 and for the six months ended June 30, 1996 and 1997 include the accounts of
the Company and its wholly-owned management company subsidiaries. The Company's
subsidiaries acquire operating assets and assume certain liabilities of the
affiliated dental practices and account for the Company's management activities
with the affiliated dental practices under the Company's long-term management
services agreements. The condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the annual financial statements of the Company included
elsewhere herein. In management's opinion, such interim financial statements
include all normal recurring adjustments considered necessary for a fair
presentation of such financial statements. Interim results are not necessarily
indicative of results for a full year.

2. EARNINGS PER SHARE:

In June 1997, the Company's Board of Directors declared and the
stockholders approved a 1-for-2 reverse split of the Company's common stock. All
share and per share information in the accompanying consolidated financial
statements has been retroactively restated to reflect the effects of the reverse
stock split.

Earnings per share is computed on the basis of the weighted average number
of shares of common stock and common stock equivalents outstanding during each
period. Shares outstanding for all periods presented have been retroactively
adjusted to reflect the Reorganization discussed in the annual financial
statements and the issuance of common stock upon the contemplated conversion of
the Series A and Series C stock in connection with the planned initial public
offering. Additionally, in accordance with SAB Number 55, pro forma earnings per
share have been presented for 1997 to reflect issuance of the number of shares
that would have been necessary to fund the $6,000,000 distribution to the
Company's owner in connection with the Reorganization (at the initial public
offering price of $13.00 per share). Fully diluted earnings per share are not
presented because such amounts would be the same as amounts computed for primary
earnings per share.

3. ACQUISITIONS

In June 1997, the Company entered into management services and option
agreements with SW Dental Associates, LC ("SW Dental"), a group dental
practice located in Austin, Texas. Under the terms of the option agreement the
Company agreed to acquire the assets and assume certain liabilities of SW
Dental. As partial consideration the Company paid a $1.0 million non-refundable
deposit in June 1997. The deposit, together with a $500,000 deposit paid in
September 1996, will be applied against the purchase price of $6.4 million which
will consist of cash and shares of the Company's Series B Convertible Preferred
Stock. In the event the acquisition is not consummated by May 31, 1998, the
Company will forfeit the $1.5 million paid as partial consideration and the
owners of SW Dental will have the option for 60 days thereafter to purchase the
Company's operations and facilities in the Austin, Texas area for $3.4 million.

F-35
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:

Long-term debt and capital lease obligations consisted of the following at
June 30, 1997 (in thousands):

Term loan............................... $ 10,847
Seller Notes............................ 4,363
Other various notes payable and capital
lease obligations..................... 900
---------
Total debt and capital lease
obligations....................... 16,110
Less current portion.................... 11,881
---------
Total long-term debt and capital
lease obligations................. $ 4,229
=========

Long-term debt related party consisted of the following at June 30, 1997
(in thousands):

Senior Subordinated Notes............... $ 10,400
Less discount........................... 3,446
---------
Total debt related party........... 6,954
Less current portion.................... 856
---------
Long-term debt related party....... $ 6,098
=========

In June 1997, the Company amended and restated the Bank Credit Facility
with the bank, which among other items as further described in the Company's
annual financial statements, reduced the bank's aggregate commitment under the
term loan to $10.8 million.

In June 1997, the Company and the holders of Senior Subordinated Notes
amended the agreement to provide an additional $2.0 million in Senior
Subordinated Notes, due January 31, 1998, with interest payable monthly at a
rate of 12 percent per annum. The Company also issued 485,382 shares of Series C
Convertible Preferred Stock (the "Series C Stock"). The proceeds were
allocated between the Senior Subordinated Notes and the Series C Stock based on
their relative fair values, resulting in a discount on the $2.0 million Senior
Subordinated Notes of $1.1 million and an effective rate through maturity of
approximately 200%.

5. SERIES C CONVERTIBLE PREFERRED STOCK

In June 1997, the Company issued 485,382 shares of its Series C Stock in
connection with issuance of $2 million in Senior Subordinated Notes. The Series
C Stock is convertible into 242,691 shares of the Company's common stock.

The Series C Stock is mandatorily redeemable at the fair market value of
the underlying common stock at the date of redemption at the holders option
either upon receipt of a change of control notice or after December 18, 2001, if
no secondary market exists for Series C Stock. The Series C Stock has been
recorded based on allocation of proceeds of the June 1997 issuance of $2.0
million Senior Subordinated Notes as described in Note 4. The Company evaluates
the redemption value of the Series C Stock at each balance sheet date and
accretes the portion of the difference between the recorded value at that date
and the redemption value over the remaining period to the earliest redemption
date, December 18, 2001. The acretion for each period is charged to Series C
Stock dividends. The effective yield of the Series C Stock through its
redemption date approximated 18.5% based on the fair value of the underlying
common stock at June 30, 1997. The Company has a right to call all the shares of
the Series C Stock at $.001 per share, upon a qualifying public offering of the
Company's common stock.

F-36
<PAGE>
CASTLE DENTAL CENTERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

6. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is subject to claims and suits arising in the ordinary course
of operations. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

In July 1997, the former owner of Horizon Dental Centers, who is employed
by the Company as a regional manager, contacted the Company asserting that the
Company misrepresented the value of the Common Stock issued to him as a part of
the consideration for the acquisition, and demanded the issuance to him of
approximately 200,000 additional shares. The Company believes that these claims
for additional consideration from the sale of Horizon Dental Centers are without
merit. In the opinion of management, resolution of these claims will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.

DENTIST EMPLOYMENT AGREEMENTS AND PROFESSIONAL LIABILITY

Each affiliated dental practice has entered into an employment agreement
with each full time dentist, orthodontist and other dental specialist employed
by it. Although the form of contract varies somewhat among practices and among
dentists with different specialties, the typical contract provides for a defined
compensation arrangement, including performance-based compensation, liquidated
damages and a covenant not to compete. Each full time dentist is required to
maintain professional liability insurance, and mandated coverage limits are
generally at least $1,000,000 per claim and $1,000,000 in aggregate. In
addition, many affiliated dental practices employ part time dentists. Not all
part time dentists have employment agreements, but all part time dentists are
required to carry professional liability insurance in specific amounts.

7. STOCK OPTIONS:

In August 1997, the Company approved grants of employee and director stock
options for approximately 635,000 shares of the Company's common stock. The
grants are contingent upon completion of the Company's initial public offering
("IPO") of its common stock and will be exercisable at the IPO price. The
options will generally vest 20% each year on the anniversary date of the grant.

F-37

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Members of
SW Dental Associates, LC:

We have audited the accompanying balance sheets of SW Dental Associates, LC
("SW Dental Associates") as of December 31, 1995 and 1996, and the related
statements of operations, changes in members' equity (deficit) and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SW Dental Associates as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P.

Houston, Texas
June 18, 1997

F-38
<PAGE>
SW DENTAL ASSOCIATES
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 101 $ 285
Patient receivables, net of
allowance for uncollectible
accounts of $170 and $121,
respectively................... 164 218
Other current assets............ 30 35
--------- ---------
Total current assets.......... 295 538
Property and equipment, net..... 334 419
Other assets.................... 2 3
--------- ---------
Total assets............... $ 631 $ 960
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:.................
Current portion of long-term
debt........................... $ 55 $ 60
Current portion of capital lease
obligations -- related party... 37 66
Accounts payable and accrued
liabilities.................... 164 186
--------- ---------
Total current
liabilities.............. 256 312
Long-term debt, net of current
portion............................ 128 68
Capital lease obligations -- related
party, net of current portion...... 182 251
Commitments and contingencies
Members' equity:
Common stock, $1 par value,
1,000 shares authorized, 1,000
shares issued and
outstanding.................... 1 1
Retained earnings............... 64 328
--------- ---------
Members' equity............ 65 329
--------- ---------
Total liabilities and
members' equity.......... $ 631 $ 960
========= =========

The accompanying notes are an integral part of the financial statements

F-39
<PAGE>
SW DENTAL ASSOCIATES
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
Net patient revenue..................... $ 3,745 $ 4,850
--------- ---------
Expenses:
Dentists' salaries................. 672 1,138
Clinical salaries.................. 1,051 1,249
Dental supplies and laboratory
fees.............................. 641 621
Rental and lease expense........... 108 137
Advertising and marketing.......... 90 197
Depreciation and amortization...... 74 100
Other operating expenses........... 610 511
General and administrative......... 237 351
--------- ---------
Total expenses................ 3,483 4,304
--------- ---------
Operating income.............. 262 546
Interest expense........................ 43 34
--------- ---------
Net income.............................. $ 219 $ 512
========= =========
If all of the Company's operations had
been subject to income taxes, net
income would have been as follows
(unaudited):
Historical income before income
taxes............................. $ 219 $ 512
Provision for income taxes......... (81) (189)
--------- ---------
Pro forma net income.................... $ 138 $ 323
========= =========

The accompanying notes are an integral part of the financial statements.

F-40
<PAGE>
SW DENTAL ASSOCIATES
STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>

RETAINED
COMMON STOCK EARNINGS TOTAL
---------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995........... 1,000 $ 1 $ (24) $ (23)
Distribution to members......... -- -- (131) (131)
Net income...................... -- -- 219 219
------ ------ ------------ ---------
Balance at December 31, 1995......... 1,000 1 64 65
Distribution to members......... -- -- (248) (248)
Net income...................... -- -- 512 512
------ ------ ------------ ---------
Balance at December 31, 1996......... 1,000 $ 1 $ 328 $ 329
====== ====== ============ =========
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-41
<PAGE>
SW DENTAL ASSOCIATES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
Cash flows from operating activities:
Net income......................... $ 219 $ 512
Adjustments:
Provision for bad debts....... 114 61
Depreciation and
amortization................ 74 100
Changes in operating assets
and liabilities:
Patient receivables...... (224) (115)
Other current assets..... (25) (5)
Other assets............. (2) (1)
Accounts payable and
accrued liabilities.... 34 22
--------- ---------
Net cash provided
by operating
activities......... 190 574
--------- ---------
Cash flows used in investing
activities -- capital expenditures.... (28) (35)
--------- ---------
Cash flows from financing activities:
Repayment of debt.................. (46) (55)
Repayment of capital leases........ (35) (52)
Distributions to members........... (131) (248)
--------- ---------
Net cash used in
financing
activities......... (212) (355)
Net change in cash and cash
equivalents........................... (50) 184
Cash and cash equivalents at beginning
of period............................. 151 101
--------- ---------
Cash and cash equivalents at end of
period................................ $ 101 $ 285
========= =========

The accompanying notes are an integral part of the financial statements.

F-42
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CORPORATE ORGANIZATION

The statements reflect the operations of SW Dental Associates, LC (the
"Company"), which is a provider of dental and orthodontic services and
products that owns and operates dental centers in the Austin, Texas area.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during each
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid financial investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.

The Company maintains cash balances at financial institutions. Accounts at
each institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's accounts at these institutions may, at times, exceed the
federally insured limits. The Company has not experienced any losses in such
accounts.

REVENUE RECOGNITION

Net patient revenue represents amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed.

Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payors for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Maintenance and repairs are charged to expense whereas renewals and
major replacements are capitalized. Gains and losses from dispositions are
included in operations.

INCOME TAXES

The Company is a limited liability company and, accordingly, all federal
and state tax liabilities are the responsibility of the respective members.

Income taxes for the pro forma calculation are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.

ADVERTISING

Advertising costs are expensed when incurred.

F-43
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of
this standard had no effect on the financial statements.

2. SELECTED BALANCE SHEET INFORMATION:

The details of certain balance sheet accounts are as follows:

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Property and equipment:
Leasehold improvements.......... $ 202 $ 204
Equipment....................... 12 37
Furniture and fixtures.......... 2 10
Equipment under capital
leases......................... 296 446
--------- ---------
Total property and
equipment.............. 512 697
Less accumulated depreciation
and amortization............... 178 278
--------- ---------
Property and equipment,
net.................... $ 334 $ 419
========= =========

Accumulated amortization for equipment under capital leases as of December
31, 1995 and 1996 was $100 and $162, respectively.

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Accounts payable and accrued
liabilities:
Trade........................... $ 88 $ 64
Accrued payroll................. 76 119
Other accrued liabilities....... -- 3
--------- ---------
$ 164 $ 186
========= =========

3. LONG-TERM DEBT:

At December 31, 1995 and 1996, long-term debt consisted of the following:

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Uncollateralized note payable due in
monthly installments of $2
principal and interest, interest
rate of 9% per year, maturing in
1999............................... $ 92 $ 70
Uncollateralized note payable to a
related party (see Note 8) due in
monthly installments of $1
principal and interest, interest
rate of 10% per year, maturing in
1997............................... 19 10
Note payable due in monthly
installments of $2 principal and
interest, interest rate of 9.25%
per year, maturing in 1998,
collateralized by certain
receivables and fixed assets of the
Company............................ 72 48
--------- ---------
Total...................... 183 128
Less current portion....... 55 60
--------- ---------
Total long-term debt....... $ 128 $ 68
========= =========

F-44
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of long-term debt as of December 31, 1996 for each
of the next five years were as follows (in thousands):

1997.................................... $ 60
1998.................................... 47
1999.................................... 21
---------
$ 128
=========

4. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company leases a portion of its property and equipment under capital
and operating leases. The capital leases are with a related party (see Note 8).
Future minimum lease payments under capital leases and noncancelable operating
leases with remaining terms of one or more years consisted of the following at
December 31, 1996 (in thousands):

CAPITAL OPERATING
------- ---------
1997.................................... $ 94 $ 67
1998.................................... 86 59
1999.................................... 70 62
2000.................................... 64 54
2001.................................... 45 49
Thereafter.............................. 43 135
------- ---------
Total minimum lease obligations......... 402 $ 426
=========
Less amount representing interest....... 85
-------
Present value of minimum lease
obligations........................... 317
Less current portion............... 66
-------
Long-term capital lease obligations..... $ 251
=======

LITIGATION

5. INCOME TAXES:

The difference between the federal tax rate and the Company's effective tax
rate for the years ended December 31, 1995 and 1996 was as follows:

DECEMBER 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)........ $ 74 $ 174
State income taxes, net of federal
tax................................... 7 15
Income not subject to corporate level
federal tax........................... (81) (189)
--------- ---------
$ -- $ --
========= =========

F-45
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. SUPPLEMENTAL CASH FLOW INFORMATION:

YEAR ENDED
DECEMBER 31,
--------------------
1995 1996
--- ---------
(IN THOUSANDS)
Cash paid during the period for
interest.............................. $ 43 $ 34
Noncash transactions -- capital
leases................................ 34 150

7. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

CREDIT RISK

The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the creditworthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

The carrying amounts of cash and cash equivalents, patient receivables and
accounts payable approximate fair values due to the short-term maturities of
these instruments. The carrying amounts of the Company's fixed rate long-term
borrowings and capitalized lease obligations as of December 31, 1995 and 1996,
approximate their fair value.

8. RELATED PARTY TRANSACTIONS:

The Company leased certain assets from a relative of the owners. These
leases were recorded as capital leases. At December 31, 1995 and 1996, the
balance of capital lease obligations was approximately $220,000 and $317,000,
respectively.

9. SUBSEQUENT EVENT:

In September 1996, the Company and its members entered into a letter of
intent to sell the Company to Castle Dental Centers of Texas, Inc. ("Castle").
In June 1997, the Company entered into management services and option agreements
concerning the sale to Castle. As consideration for the letter of intent and
option agreements, the Company's members received non-refundable deposits of
$1.5 million, which will be applied against the purchase price. In the event the
sale is not consummated by May 31, 1998, the Company's members will retain the
deposits and the Company will have the option for 60 days thereafter to purchase
Castle's operations and facilities in Austin, Texas.

F-46
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED BALANCE SHEET (UNAUDITED)

DECEMBER 31, JUNE 30,
1996 1997
------------ --------
(IN THOUSANDS)

ASSETS
Current assets:
Cash and cash equivalents.......... $ 285 $ 26
Patient receivables, net........... 218 276
Other current assets............... 35 105
------------ --------
Total current assets.......... 538 407
Property and equipment, net............. 419 378
Other assets............................ 3 3
------------ --------
Total assets.................. $ 960 $ 788
============ ========

LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations..... $ 126 $ 126
Accounts payable and accrued
liabilities....................... 186 224
------------ --------
Total current liabilities..... 312 350
Long-term debt and capital lease
obligations, net of current portion... 319 286
Commitments and contingencies
Common stock, $1 par value, 1,000 shares
authorized, issued and
outstanding........................... 1 1
Retained earnings....................... 328 151
------------ --------
Total liabilities and members'
equity..................... $ 960 $ 788
============ ========

The accompanying notes are an integral part of the financial statements.

F-47
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net patient revenue.................. $ 2,217 $ 2,623
Expenses:
Dentists' salaries.............. 479 635
Clinical salaries............... 601 752
Dental supplies and laboratory
fees........................... 348 346
Rental and lease expense........ 68 58
Advertising and marketing....... 80 89
Depreciation.................... 38 50
Other operating expenses........ 251 174
General and administrative...... 148 232
--------- ---------
Total expenses............. 2,013 2,336
--------- ---------
Operating income........... 204 287
Interest expense..................... 12 17
--------- ---------
Net income........................... $ 192 $ 270
========= =========
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income before income
taxes.......................... $ 192 $ 270
Provision for income taxes...... 71 100
--------- ---------
Pro forma net income............ $ 121 $ 170
========= =========

The accompanying notes are an integral part of the financial statements.

F-48
<PAGE>
SW DENTAL ASSOCIATES
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)

SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Net cash provided by operating
activities............................ $ 273 $ 229
--------- ---------
Net cash used in investing
activities - capital expenditures..... (84) (9)
--------- ---------
Financing activities:
Payments on long-term debt and
capital leases.................... (27) (31)
Distributions to members........... (217) (448)
--------- ---------
Net cash used in financing activities... (244) (479)
--------- ---------
Net increase in cash and cash
equivalents................. (55) (259)
Cash and cash equivalents, beginning of
period................................ 101 285
--------- ---------
Cash and cash equivalents, end of
period................................ $ 46 $ 26
========= =========

The accompanying notes are an integral part of the financial statements.

F-49
<PAGE>
SW DENTAL ASSOCIATES
NOTES TO CONDENSED FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND BASIS OF PRESENTATION:

ORGANIZATION

SW Dental Associates (the "Company") is a provider of dental and
orthodontic services and products in the Austin, Texas area. The accompanying
unaudited condensed financial statements for the six months ended June 30, 1996
and 1997, reflect the results of operations for the Company and have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. These unaudited condensed financial statements should be read in
conjunction with the annual financial statements of the Company included
elsewhere, herein. In management's opinion, such interim financial statements
include all normal recurring adjustments considered necessary for a fair
presentation of such financial statements. Interim results are not necessarily
indicative of results for a full year.

2. COMMITMENTS AND CONTINGENCIES:

LITIGATION

3. MANAGEMENT SERVICES AND OPTION AGREEMENTS

In May 1997, the Company entered into management services and option
agreements with Castle Dental Centers of Texas ("Castle") which replaced the
September 1996 definitive acquisition agreement. The new agreements contain
stipulations regarding the retention of deposits paid to the Company's
stockholders and an option to acquire the Castle facilities in the Austin, Texas
area for $3.4 million if Castle's acquisition of the Company is not consummated
by May 1998.

F-50

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder of
1st Dental Care Inc.:

We have audited the accompanying combined balance sheets of 1st Dental Care
as of December 31, 1994 and 1995, and the related combined statements of
operations, changes in stockholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1995. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of 1st Dental Care as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Houston, Texas
June 10, 1996

F-51
<PAGE>
1ST DENTAL CARE
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)

DECEMBER 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Patient receivables, net of
allowance for uncollectible
accounts of
$26 and $21 in 1994 and 1995,
respectively................... $ 166 $ 130
Unbilled patient receivables,
net of allowance for
uncollectible accounts
of $12 and $19 in 1994 and
1995, respectively............. 61 107
Other current assets............ 17 25
--------- ---------
Total current assets....... 244 262
Property and equipment, net.......... 1,272 1,242
Other assets......................... 2 14
--------- ---------
Total assets............... $ 1,518 $ 1,518
========= =========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term
debt........................... $ 293 $ 236
Accounts payable and accrued
expenses....................... 746 747
--------- ---------
Total current
liabilities.............. 1,039 983
Deferred revenue..................... 37 28
Long-term debt....................... 593 884
Commitments and contingencies
Common stock......................... 5 5
Additional paid-in capital........... 427 427
Accumulated deficit.................. (583) (809)
--------- ---------
Stockholders' deficit...... (151) (377)
--------- ---------
Total liabilities and
stockholders' deficit.... $ 1,518 $ 1,518
========= =========

The accompanying notes are an integral part of the combined financial
statements.

F-52
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Net patient revenues................. $ 5,763 $ 6,274 $ 6,465
--------- --------- ---------
Expenses:
Dentists' salaries.............. 1,048 1,243 1,221
Clinical salaries............... 1,919 2,031 2,086
Dental supplies and laboratory
fees.......................... 446 463 511
Rental and lease expense........ 326 339 373
Advertising and marketing....... 165 156 163
Depreciation and amortization... 176 199 236
Other operating expenses........ 359 417 392
General and administrative...... 954 1,126 1,040
--------- --------- ---------
Total expenses............. 5,393 5,974 6,022
--------- --------- ---------
Operating income........... 370 300 443
Loss on sale of property and
equipment.......................... -- -- 95
Interest expense..................... 48 83 106
--------- --------- ---------
Income before extraordinary item..... 322 217 242
Extraordinary gain on extinguishment
of debt.............................. -- -- 112
--------- --------- ---------
Net income........................... $ 322 $ 217 $ 354
========= ========= =========
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income before income
taxes and extraordinary
gain.......................... $ 242
Provision for income taxes...... 90
---------
Net income before extraordinary
gain.......................... 152
Extraordinary gain, net of tax
effect of $41................. 71
---------
Net income...................... $ 223
=========

The accompanying notes are an integral part of the combined financial
statements.

F-53
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED EQUITY
STOCK CAPITAL DEFICIT (DEFICIT)
------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1993........... $ 5 $ 427 $ (159) $ 273
Distribution to stockholders.... -- -- (599) (599)
Net income...................... -- -- 322 322
------ ---------- ----------- ---------
Balance at December 31, 1993......... 5 427 (436) (4)
Distribution to stockholders.... -- -- (364) (364)
Net income...................... -- -- 217 217
------ ---------- ----------- ---------
Balance at December 31, 1994......... 5 427 (583) (151)
Distribution to stockholders.... -- -- (580) (580)
Net income...................... -- -- 354 354
------ ---------- ----------- ---------
Balance at December 31, 1995......... $ 5 $ 427 $ (809) $ (377)
====== ========== =========== =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.

F-54
<PAGE>
1ST DENTAL CARE
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities:
Net income......................... $ 322 $ 217 $ 354
Adjustments:
Provision for bad debts 18 44 8
Depreciation and
amortization.............. 176 199 236
Losses on disposition and
impairment of property and
equipment.................. -- -- 95
Extraordinary gain on
extinguishment of debt.... -- -- (112)
Changes in operating assets
and liabilities:
Patient receivables...... (62) 18 35
Unbilled patient
receivables.......... 15 10 (53)
Other current assets..... 19 (6) (8)
Other assets............. 20 (7) (6)
Accounts payable and
accrued
liabilities.......... 182 86 1
Other liabilities........ -- (24) (9)
--------- --------- ---------
Net cash provided
by operating
activities...... 690 537 541
--------- --------- ---------
Cash flows used in investing
activities -- capital expenditures.... (187) (161) (307)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt................. 470 300 532
Repayment of debt.................. (346) (340) (186)
Distribution to owners............. (599) (364) (580)
--------- --------- ---------
Net cash used in
financing
activities...... (475) (404) (234)
--------- --------- ---------
Net change in cash and cash
equivalents........................... 28 (28) --
Cash and cash equivalents, beginning of
period................................ -- 28 --
--------- --------- ---------
Cash and cash equivalents, end of
period................................ $ 28 $ -- $ --
========= ========= =========

The accompanying notes are an integral part of the combined financial
statements.

F-55
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CORPORATE ORGANIZATION

1st Dental Care (the "Company") is a provider of dental and orthodontic
services and products that owns the assets of and provides management services
to dental and orthodontic centers in northwest and west Florida. The combined
financial statements for 1995 reflect the operations of Lester B. Greenberg,
D.D.S., P.A., 1st Dental Care Inc. and M&B Dental Lab because all entities are
under common control. The combined financial statements for 1993 and 1994
reflect the combined operations of the following corporations because these
entities were under common control:

Bayonett Point Inc. Holiday Inc. Timber Pines
Boot Ranch Inc. Lakewood Inc. Town and Country
Crystal River Inc. Largo Mall Inc. First Dental Management
Carrollwood Inc. Port Richey Inc. First Dental P.A.
East Bay Inc. Sear Town M & B Dental Lab
Seven Hills

These corporations were dissolved and merged into the corporations included
in the 1995 financial statements. All significant intercompany accounts and
transactions have been eliminated in combination.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during each
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt investments with original
maturities of three months or less when purchased to be cash equivalents. The
carrying amounts approximate fair value because of the short maturity.

REVENUE RECOGNITION

Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Orthodontic revenue is recognized in accordance with
the proportional performance method. Under this method, revenue is recognized as
services are incurred under the terms of contractual agreements with each
patient. Approximately 25% of the services are performed in the first month with
the remaining services recognized ratably over the remainder of the contract.
Billings under each contract, which average approximately 28 months, are made
equally throughout the term of the contract, with final payment at the
completion of the treatment.

F-56
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Fully depreciated assets are retained in property and equipment until
they are removed from service. Fully depreciated assets as of December 31, 1994
and 1995 were approximately $314,000. Maintenance and repairs are charged to
expenses whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations.

DEBT ISSUANCE COSTS

The costs related to the issuance of debt are capitalized and amortized
using the effective interest method over the life of the related debt.

INCOME TAXES

The Companies are Subchapter S entities and, accordingly, all federal and
state tax liabilities are the responsibility of the shareholder.

Income taxes for the pro forma calculations are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.

ADVERTISING

Advertising costs are expensed when incurred.

RECENT FASB PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of SFAS No. 121 did not have a material impact on its
financial position, results of operations or cash flows.

F-57
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

2. SELECTED BALANCE SHEET INFORMATION:

The details of certain balance sheet accounts are as follows:

DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Property and equipment:
Equipment and vehicles.......... $ 1,225 $ 1,356
Leasehold improvements.......... 465 450
Furniture and fixtures.......... 254 210
Buildings, land and
improvements.................. 516 524
--------- ---------
Total property and
equipment............... 2,460 2,540
Less accumulated depreciation
and amortization.............. 1,188 1,298
--------- ---------
Property and equipment,
net..................... $ 1,272 $ 1,242
========= =========
Accounts payable and accrued
liabilities:
Trade........................... $ 465 $ 440
Compensation.................... 170 257
Affiliate....................... 75 23
Other........................... 36 27
--------- ---------
$ 746 $ 747
========= =========

3. LONG-TERM DEBT AND LINE OF CREDIT:

Long-term debt consisted of the following:

DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Revolving credit loan................ $ -- $ 201
Term loans........................... 886 919
--------- ---------
Total debt................. 886 1,120
Less current portion................. 293 236
--------- ---------
Total long-term debt....... $ 593 $ 884
========= =========

The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):

1996................................. $ 236
1997................................. 228
1998................................. 179
1999................................. 81
2000................................. 113
Thereafter........................... 283
---------
$ 1,120
=========

In August 1995, the Company entered into a collateralized revolving credit
agreement for $400,000 to be used for the renovation of and purchase of
equipment for a new clinical facility. All advances under this credit facility
bear interest at the rate of 2.5% above the prime rate (8.25% at December 31,
1995). At

F-58
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1995, the outstanding balance of this credit facility was $201,000.
The line of credit is payable on demand and is renewable annually with advances
amortized over a five year period. The credit agreement contains customary
restrictive covenants that include, but are not limited to, requiring the
Company to meet certain financial ratios. The Company was in compliance with all
loan covenants to which it was subject as of December 31, 1995.

At December 31, 1995, the Company had several term loans payable to various
banks for a total principal balance of $794,000. These loans are collateralized
by the assets of the Company and have fixed interest rates ranging from 7.58% to
11.00% per year. All notes are payable in monthly installments through March
2001. In addition, the Company has a term loan collateralized by the personal
assets of the shareholders with a balance of $125,000 at December 31, 1995. The
note bears interest at a fixed rate of 16% per year and is payable in monthly
installments of principal and interest of $6,400 through January 1997.

In March 1995, the Company paid a note payable to a bank. The note was in
held in receivership and extinguishment of this debt resulted in a gain of
$112,000, which has been reflected in the Company's statement of operations as
an extraordinary gain.

4. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

Future minimum lease payments under noncancelable operating leases with
remaining terms of one or more years consisted of the following at December 31,
1995 (in thousands):

1996.................................... $ 418
1997.................................... 349
1998.................................... 248
1999.................................... 137
2000.................................... 83
Thereafter.............................. 44
---------
Total minimum obligation................ $ 1,279
=========

LITIGATION

5. INCOME TAXES:

The differences between the statutory federal tax rate and the Company's
effective tax rate were as follows:

DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Tax at U.S. statutory rate (34%)........ $ 109 $ 74 $ 120
State income taxes, net of federal
tax................................... 6 4 11
Income not subject to corporate level
federal tax........................... (115) (78) (131)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========

F-59
<PAGE>
1ST DENTAL CARE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6. SUPPLEMENTAL CASH FLOW INFORMATION:

DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Cash paid during the period for:
Interest........................... $ 48 $ 83 $ 106
========= ========= =========

7. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

CREDIT RISK

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's fixed rate long-term
borrowings as of December 31, 1994 and 1995, respectively, approximate their
fair value.

The carrying value of the Company's revolving credit agreement approximates
fair value because the rate on such agreement is variable, based on current
market.

8. SUBSEQUENT EVENTS:

On March 31, 1996, the Company closed a facility due to ongoing operating
losses. It is not management's intent to reopen this facility. The Company wrote
off certain assets associated with this facility in 1995. For the period ended
December 31, 1995, the Company recognized a loss of $41,000.

The assets of the Company were acquired by Castle Dental Centers of Florida
in May 1996.

9. RELATED PARTY TRANSACTIONS:

The Company purchases dental supplies from an affiliated company
wholly-owned by one of the Company's stockholders. For the years ended 1993 and
1994, the Company purchased $120,000 of dental supplies from this affiliate and
none in fiscal year ended 1995.

F-60

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder of
Mid-South Dental Centers P.C.:

We have audited the accompanying balance sheets of Mid-South Dental Centers
as of December 31, 1994 and 1995, and the related combined statements of
operations, changes in stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1995. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mid-South Dental Centers as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Houston, Texas
June 10, 1996

F-61
<PAGE>
MID-SOUTH DENTAL CENTERS
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
--------------------
1994 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents....... $ 52 $ 166
Patient receivables, net of
allowance for uncollectible
accounts of $28
and $108 in 1994 and 1995,
respectively................... 247 281
Unbilled patient receivables,
net of allowance for
uncollectible accounts
of $9 and $12 in 1994 and
1995, respectively............. 50 66
Notes receivable shareholder.... 84 --
Other current assets............ 14 12
--------- ---------
Total current
assets................. 447 525
Property and equipment, net.......... 504 510
Other assets......................... 20 14
--------- ---------
Total assets.......... $ 971 $ 1,049
========= =========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term
debt........................... $ 50 $ 99
Current portion of capital lease
obligations.................... 118 98
Accounts payable and accrued
expenses....................... 240 209
--------- ---------
Total current
liabilities............ 408 406
Long-term debt, net of current
portion............................ 254 399
Capital lease obligations, net of
current portion.................... 123 112
Commitments and contingencies
Common stock, $1 par value, 1,000
shares authorized, 1,000 shares
issued
and outstanding.................... 1 1
Additional paid-in capital........... 4 4
Retained earnings.................... 181 127
--------- ---------
Stockholder's
equity.............. 186 132
--------- ---------
Total liabilities and
stockholder's
equity.............. $ 971 $ 1,049
========= =========

The accompanying notes are an integral part of the financial statements.

F-62
<PAGE>
MID-SOUTH DENTAL CENTERS
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Net patient revenues................. $ 4,290 $ 4,871 $ 5,435
--------- --------- ---------
Expenses:
Dentists' salaries................. 710 844 920
Clinical salaries.................. 1,606 1,818 2,063
Dental supplies and laboratory
fees............................ 520 642 732
Rental and lease expense........... 283 293 321
Advertising and marketing.......... 149 163 178
Depreciation and amortization...... 124 121 149
Other operating expenses........... 147 147 210
General and administrative......... 317 367 394
Compensation to stockholder........ 270 312 457
--------- --------- ---------
Total expenses................ 4,126 4,707 5,424
--------- --------- ---------
Operating income.............. 164 164 11
Interest expense..................... 20 32 65
--------- --------- ---------
Net income (loss).................... $ 144 $ 132 $ (54)
========= ========= =========
If all of the Company's operations
had been subject to income
taxes, net loss would have been as
follows (unaudited):
Historical loss before income
taxes........................... $ (54)
Benefit for income taxes........... (20)
---------
Pro forma net loss................. $ (34)
=========

The accompanying notes are an integral part of the financial statements.

F-63
<PAGE>
MID-SOUTH DENTAL CENTERS
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED TOTAL
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993........... 1,000 $ 1 $ 4 $ 1 $ 6
Net income......................... -- -- -- 144 144

------ ------ ---------- -------- ------
Balance at December 31, 1993......... 1,000 1 4 145 150
Distribution to shareholder........ -- -- -- (96) (96)
Net income......................... -- -- -- 132 132

------ ------ ---------- -------- ------
Balance at December 31, 1994......... 1,000 1 4 181 186
Net loss........................... -- -- -- (54) (54)

------ ------ ---------- -------- ------
Balance at December 31, 1995......... 1,000 $ 1 $ 4 $ 127 $ 132
====== ====== ========== ======== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-64
<PAGE>
MID-SOUTH DENTAL CENTERS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss).................. $ 144 $ 132 $ (54)
Adjustments:
Provision for bad debts....... 12 36 86
Depreciation and
amortization.............. 124 121 149
Changes in operating assets
and liabilities:
Patient receivables...... (56) (103) (117)
Unbilled patient
receivables.......... (59) (19)
Other current assets..... 13 (14) 2
Other assets............. 2 (1) 7
Accounts payable and
accrued
liabilities.......... (16) (42) (31)
--------- --------- ---------
Net cash provided
by operating
activities...... 223 70 23
--------- --------- ---------
Cash flows used in investing
activities -- capital expenditures.... (31) (30) (56)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt................. -- 313 256
Repayment of debt.................. (126) (44) (83)
Repayment of capital leases........ (66) (77) (110)
Distributions to stockholder....... -- (96) --
Notes receivable stockholder....... -- (84) 84
--------- --------- ---------
Net cash provided
by (used in)
financing
activities...... (192) 12 147
--------- --------- ---------
Net change in cash and cash
equivalents........................... -- 52 114
Cash and cash equivalents at beginning
of period............................. -- -- 52
--------- --------- ---------
Cash and cash equivalents, at end of
period................................ $ -- $ 52 $ 166
========= ========= =========

The accompanying notes are an integral part of the financial statements.

F-65
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CORPORATE ORGANIZATION

Mid-South Dental Centers (the "Company") is a provider of dental and
orthodontics services and products that owns and operates dental centers in the
Nashville and Chattanooga, Tennessee areas.

The statements reflect the operations of Mid-South Dental Centers P.C.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during each
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

REVENUE RECOGNITION

Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Orthodontic revenue is recognized in accordance with
the proportional performance method. Under this method, revenue is recognized as
cost of services are incurred under the terms of contractual agreements with
each patient. Approximately 25% of services are performed in the first month
with the remaining services recognized ratably over the remainder of the
contract. Billings under each contract, which average approximately 28 months,
are made equally throughout the term of the contract, with final payment at the
completion of the treatment.

Accounts receivable primarily consist of receivables from patients,
insurers, government programs and other third-party payers for services provided
by dentists. An allowance for doubtful accounts is recorded by the Company based
on historical experience.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
ten years. Fully depreciated assets are retained in property and equipment until
they are removed from service. Fully depreciated assets as of December 31, 1994
and 1995 were approximately $376,000. Maintenance and repairs are charged to
expenses whereas renewals and major replacements are capitalized. Gains and
losses from dispositions are included in operations.

DEBT ISSUANCE COSTS

The costs related to the issuance of debt are capitalized and amortized
using the effective interest method over the lives of the related debt.

F-66
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company is a Subchapter S entity and, accordingly, all federal and
state tax liabilities are the responsibility of the shareholder.

Income taxes, including pro forma calculations, are determined under the
liability method. Under this method, deferred taxes are based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted marginal tax rates currently in effect.

ADVERTISING

Costs incurred for advertising are expensed when incurred.

RECENT FASB PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of this standard did not have a material effect on the
Company's financial position, results of operations or cash flows.

2. SELECTED BALANCE SHEET INFORMATION:

The details of certain balance sheet accounts are as follows:

DECEMBER 31
--------------------
1994 1995
--------- ---------
Property and equipment:
Equipment....................... $ 892 $ 1,026
Leasehold improvements.......... 301 313
Furniture and fixtures.......... 93 101
--------- ---------
Total property and
equipment.................. 1,286 1,440
Less accumulated depreciation
and amortization................ 782 930
--------- ---------
Net property and
equipment.................. $ 504 $ 510
========= =========

DECEMBER 31
--------------------
1994 1995
--------- ---------
Accounts payable and accrued
liabilities:
Trade........................... $ 178 $ 134
Accrued liabilities............. 62 75
--------- ---------
$ 240 $ 209
========= =========

F-67
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT:

Long-term debt consisted of the following:

DECEMBER 31
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
Term loans........................... $ 304 $ 498
Less current portion................. 50 99
--------- ---------
Total long-term debt....... $ 254 $ 399
========= =========

The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):

1996.................................... $ 99
1997.................................... 112
1998.................................... 112
1999.................................... 123
2000.................................... 52
---------
$ 498
=========

In December 1994, the Company entered into a term loan payable for
$300,000. Principal and interest are payable in monthly installments of $6,000
(including interest) through November 1999, at which time all unpaid principal
together with accrued but unpaid interest shall be due and payable in full. The
note accrues interest at a rate of 9.2% per year and is collateralized by
certain equipment of the Company.

In December of 1995, the Company entered into a term loan for approximately
$78,000 collateralized by certain equipment of the Company. The note accrues
interest at a rate of 8.2% per year with principal and interest payments due
monthly through November 2000.

Also in December 1995, the Company entered into a term loan for
approximately $157,000 collateralized by the personal guaranty of the owner of
the Company. The note accrues interest at a rate of 9.7% per year with principal
and interest payments of $3,000 due monthly through November 2000.

F-68
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company leases a portion of its property and equipment under capital
and operating leases. Future minimum lease payments under capital leases and
noncancelable operating leases with remaining terms of one or more years
consisted of the following at December 31, 1995 (in thousands):

CAPITAL OPERATING
-------- ----------
1996.................................... $ 109 $ 252
1997.................................... 72 232
1998.................................... 25 226
1999.................................... 25 211
2000.................................... 9 164
Thereafter.............................. -- 330
-------- ----------
Total minimum lease obligations......... 240 $1,415
==========
Less amount representing interest....... 30
--------
Present value of minimum lease
obligations........................... 210
Less current portion............... 98
--------
Long-term capital lease obligations..... $ 112
========

LITIGATION

5. INCOME TAXES:

The differences between the federal tax rate and the Company's effective
tax rate at December 31 were as follows:

1993 1994 1995
--------- --------- ---------
Tax at U.S. statutory rate (34%)........ $ 49 $ 45 $ (18)
State income taxes, net of federal
tax................................... 4 4 (2)
Income not subject to corporate level
federal tax........................... (53) (49) 20
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========

6. SUPPLEMENTAL CASH FLOW INFORMATION:

YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Cash paid during the period for
interest.............................. $ 20 $ 32 $ 65
Noncash transactions -- capital lease
obligations........................... $ 73 $ 206 $ 100

7. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

CREDIT RISK

F-69
<PAGE>
MID-SOUTH DENTAL CENTERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

creditworthiness of patients and appropriate allowances are made to reduce
accounts to their net realizable values.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

The carrying value of the Company's revolving credit agreement approximates
fair value because the rate on such agreement is variable, based on current
market.

8. SUBSEQUENT EVENT:

The assets of the Company were acquired by Castle Dental Centers of
Tennessee in May 1996.

9. RELATED PARTY TRANSACTIONS:

The Company leased certain assets from the owner of the Company. Lease
expense related to these assets for each of the years ended 1993, 1994, and 1995
was approximately $44,000.

F-70

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder of
Horizon Dental Centers:

We have audited the accompanying combined balance sheet of Horizon Dental
Centers as of December 31, 1995, and the related combined statements of
operations, changes in stockholder's equity (deficit) and cash flows for each of
the two years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Horizon Dental
Centers as of December 31, 1994 and 1995, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.

COOPERS & LYBRAND
L.L.P.

Houston, Texas
August 15, 1996

F-71
<PAGE>
HORIZON DENTAL CENTERS
COMBINED BALANCE SHEET
DECEMBER 31, 1995
(IN THOUSANDS)

DECEMBER 31,
1995
------------
ASSETS
Current assets:
Cash and cash equivalents....... $ 50
Patient receivables............. 160
Other current assets............ 4
------------
Total current assets....... 214
Property and equipment, net..... 26
Receivable from affiliate....... 809
------------
Total assets............... $1,049
============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term
debt............................ $ 458
Accounts payable and accrued
liabilities..................... 6
------------
Total current
liabilities.................. 464
Long-term debt....................... 659
Commitments and contingencies
Common stock......................... 10
Accumulated deficit.................. (84)
------------
Total liabilities and
stockholder's deficit........ $1,049
============

The accompanying notes are an integral part of the combined financial
statements.

F-72
<PAGE>
HORIZON DENTAL CENTERS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEAR ENDED DECEMBER
31,
--------------------
1994 1995
--------- ---------
Net patient revenues................. $ 5,652 $ 5,430
--------- ---------
Expenses:
Professional fees and clinic
expenses........................ 3,006 3,012
Dental supplies and laboratory
fees............................ 124 132
Affiliate management fee........... 1,694 1,249
Rent expense....................... 615 520
Advertising and marketing.......... 264 162
General and administrative......... 106 110
Other operating expenses........... 58 58
--------- ---------
Total expenses................ 5,867 5,243
--------- ---------
Operating income (loss)....... (215) 187
--------- ---------
Interest expense..................... 37 44
--------- ---------
Net income (loss).................... $ (252) $ 143
========= =========
If all of the Company's operations
had been subject to income taxes,
net income would have been as
follows (unaudited):
Historical income before income
taxes........................... $ 143
Provision for income taxes......... 54
---------
Net income......................... $ 89
=========

The accompanying notes are an integral part of the combined financial
statements.

F-73
<PAGE>
HORIZON DENTAL CENTERS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
(IN THOUSANDS)

RETAINED
EARNINGS
COMMON (ACCUMULATED
STOCK DEFICIT)
------ ------------
Balance, January 1, 1994............. $ 9 $ 25
Stock issued.................... 1 --
Net loss........................ -- (252)
------ ------------
Balance, December 31, 1994........... 10 (227)
Net income...................... -- 143
------ ------------
Balance, December 31, 1995........... $ 10 $ (84)
====== ============

The accompanying notes are an integral part of the combined financial
statements.

F-74
<PAGE>
HORIZON DENTAL CENTERS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Cash flows from operating activities:
Net income (loss).................. $ (252) $ 143
Adjustments:
Depreciation and amortization... 2 2
Changes in operating assets and
liabilities:
Patient receivables........... (22) 10
Other current assets.......... (5) 4
Accounts payable and accrued
liabilities.................. (5) --
--------- ---------
Net cash provided by (used
in) operating
activities.............. (282) 159
--------- ---------
Cash flows used in investing
activities -- capital
expenditures....................... (20) (9)
--------- ---------
Cash flows from financing activities:
Proceeds from debt................. 577 351
Repayment of debt.................. (276) (453)
--------- ---------
Net cash provided by (used
in) financing
activities.............. 301 (102)
--------- ---------
Net change in cash and cash
equivalents........................ (1) 48
Cash and cash equivalents, beginning
of period.......................... 3 2
--------- ---------
Cash and cash equivalents, end of
period............................... $ 2 $ 50
========= =========

The accompanying notes are an integral part of the combined financial
statements.

F-75
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CORPORATE ORGANIZATION

Horizon Dental Centers (the "Company") is a provider of dental services
and products that operates dental practices in central and north Texas. The
combined financial statements for 1994 and 1995 reflect the operations of the
following corporations because these entities were under common control:

FEDERAL INCOME
NAME OF COMPANY TAX STATUS
- ---------------------------------------- ---------------
CA Dental Services, PC.................. S Corp.
NA Dental Services, PC.................. S Corp.
SCA Dental Services, PC................. S Corp.
SA Dental Services, PC.................. S Corp.
EFW Dental Services, PC................. C Corp.
NEFW Dental Services, PC................ C Corp.
HDC Dental Services, PC................. C Corp.
MIDCITIES Services, PC.................. C Corp.
West Fort Worth Dental Services, PC..... C Corp.
Austin Periodontist Assoc., Inc......... C Corp.

All significant intercompany accounts and transactions have been eliminated
in combination.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

REVENUE RECOGNITION

Net patient revenues represent amounts billed to patients for services
performed by affiliated dentists. Dental revenue is recognized as the services
are performed and billed. Accounts receivable consist primarily of receivables
from patients, insurers, and other third-party payers for dental services
provided by dentists. Such amounts are reduced by an allowance for uncollectible
accounts based on historical experience.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment, which include the amortization of assets recorded under
capital leases, are provided using the straight-line method over the estimated
useful lives of the various classes of depreciable assets, ranging from five to
seven years. Maintenance and repairs are charged to expense whereas renewals and
major replacements are capitalized. Gains and losses from dispositions are
included in operations.

F-76
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

All federal and state income tax liabilities are the responsibility of the
shareholder for the Companies that are Subchapter S Corporations.

The Subchapter C Corporations utilize the liability method for income
taxes. Under this method, deferred taxes are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates currently in effect when the differences
reverse.

ADVERTISING

Advertising costs are expensed when incurred.

RECENT FASB PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company adopted SFAS No. 121 during the first quarter of
1996. Implementation of SFAS No. 121 did not have a material impact on its
financial position, results of operations or cash flows.

2. LONG-TERM DEBT:

Long-term debt consisted of the following:

DECEMBER 31,
1995
--------------
(IN THOUSANDS)
Notes payable........................ $1,117
Less current portion................. 458
--------------
Total long-term debt....... $ 659
==============

The aggregate maturities of long-term debt as of December 31, 1995 for each
of the next five years were as follows (in thousands):

1996................................. $ 458
1997................................. 446
1998................................. 213
---------
$ 1,117
=========

The Company has various fixed rate commercial promissory notes outstanding,
that are collateralized by assets used in the Company's operations. The assets
have been sold to Consolidated Industries Inc., an entity owned by the
stockholder. The Company recorded a receivable from this affiliate. The
promissory notes are payable in monthly installments of principal and interest
ranging from $8,000 to $9,000 and have varying maturity dates through 1998.
Interest rates on these notes vary at rates ranging from 17% to 21% per year.
The affiliate makes payments of principal and interest on this debt, the
principal payments are reflected as a reduction of the receivable and the debt.
The interest cost is borne by the affiliate and incorporated into the management
fees paid by the Company (see Note 6).

F-77
<PAGE>
HORIZON DENTAL CENTERS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

3. COMMITMENT AND CONTINGENCIES:

LITIGATION

4. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS:

CREDIT RISK

The Company grants patients credit in the normal course of business. The
credit risk with respect to these patient receivables is generally considered
minimal because procedures are in effect to monitor the credit worthiness of
patients and appropriate allowances are made to reduce accounts to their net
realizable values.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short-term maturities of these
instruments. The carrying amounts of the Company's long-term borrowings as of
December 31, 1994 and 1995, respectively, approximate their fair value.

5. AFFILIATE MANAGEMENT AGREEMENT:

The Company has entered into a management agreement with Consolidated
Industries Inc., an entity owned by the Company's stockholder. Under the
agreement Consolidated provides services to the Company for a fixed fee. These
services include consultation and management services and the use of office
equipment and facilities. Fees paid to the affiliate were $1,694,000 and
$1,249,000 for 1994 and 1995, respectively.

6. PROFESSIONAL FEE AND CLINICAL AGREEMENT:

The Company has entered into professional and clinical agreements with
various professional corporations. The agreements are for services to be
provided to the Company for daily services of dentists, clinical support, and
daily management of each facility. Such fees incurred under these agreements
were $3,006,000 and $3,012,000 for 1994 and 1995, respectively.

7. SUBSEQUENT EVENTS:

Castle Dental Centers of Texas acquired certain assets and stock of the
entities described in Note 1 during August 1996.

F-78
<PAGE>
[GRAPHICS: PHOTOGRAPHS DEPICTING INTERIOR AND EXTERIOR OF DENTAL OFFICES
INCLUDING DENTAL OFFICE PERSONNEL AND PATIENTS.]
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

UNTIL OCTOBER 7, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

------------------

TABLE OF CONTENTS

PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 7
The Company.......................... 16
Use of Proceeds...................... 17
Dividend Policy...................... 18
Dilution............................. 18
Capitalization....................... 19
Selected Historical and Pro Forma
Financial Data..................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
Business............................. 33
Management........................... 45
Certain Transactions................. 52
Principal Stockholders............... 54
Description of Capital Stock......... 56
Shares Eligible for Future Sale...... 59
Underwriting......................... 61
Legal Matters........................ 62
Experts.............................. 62
Additional Information............... 63
Index to Combined Financial
Statements......................... F-1

2,500,000 SHARES

[CASTLE DENTAL CENTERS LOGO]

COMMON STOCK

-------------------------
PROSPECTUS
-------------------------
J.C. Bradford &Co.
Southcoast Capital
Corporation

September 12, 1997